Equity stripping is a process that can help to reduce the value of a real estate asset. Although most people want to increase the value of their assets, in this case, equity stripping is done to protect the assets.
Essentially, equity stripping strategies can be used by debtors as means of making properties unattractive to creditors. Equity stripping is well known for being a great method of creditor protection. It can be used to protect a home or an investment.
How Does Equity Stripping Work?
The purpose of equity stripping as an asset protection strategy is that by reducing interest in a property, creditors are discouraged from attempting claims against the debtor. In addition, but giving another party a claim against a property, an owner can continue to retain use of the property. It also provides you control over cash flow while simultaneously making the property an unattractive asset. In addition, by looking like you own nothing, it makes initiating a lawsuit a lot more difficult for the other side.
Types of Equity Stripping
Two of the most common types of equity stripping strategies are spousal stripping and home equity lines of credit (HELOC).
Spousal stripping is exactly what it sounds like. During this process, you can transfer ownership of your property to your spouse. Typically this is done when the deed holding spouse has debt and they want to protect their property. By transferring a title from one distressed spouse to the other with less debt, it will allow the spouse in debt to file a quitclaim deed to the property.
This will state that the spouse in debt never had valid ownership over the asset. It will release that spouse from any ownership, and into the name of the other spouse. Although there is no guarantee that this will work, it is an option to try.
Home Equity Lines of Credit
Another option is to take out a HELOC (home equity line of credit). By pulling out a home equity line of credit, homeowners can borrow equity against their homes. This provides a sum amount using the home as collateral. This can only be taken out against the equity that you already have in your home. When doing this, you are stripping away the equity in your home, making your home look less valuable to creditors.
Why Would Someone Want to Strip Their Equity?
Equity stripping is a good solution for many types of real estate investors and even the average homeowner. No one wants to fall into debt collections, but when this happens it is important to consider what you need to do to keep your assets safe. Not all laws protect your equity, which is why you want to make sure if you have paid off a lot on an asset, that you protect it. Equity stripping is one way to do that.
The entire purpose of equity stripping is to make the equity in a property difficult or costly to obtain. This pushes creditors from wanting to pursue a home and allows owners to keep their property safe. The entire idea is to keep control and enjoyment of the property, but maintain little or no equity for a creditor to come after.
Benefits of Equity Stripping
The benefits of equity stripping provide you more of an opportunity to avoid creditors. By equity stripping, creditors are less likely to pursue the subject property because it seems less valuable. Whether that is through a HELOC, which may give homeowners access to the equity, or through other methods.
For example, investors can use traditional LLCs to strip equity and make their assets less appealing to creditors. Either way, it allows you to safeguard your assets and avoid creditors.
Advantages & Disadvantages of Equity Stripping
Advantages of Equity Stripping
- More Money to Invest: One side benefit of equity stripping is that it can give you more money as an investor. This is typically because one of the easiest forms of equity stripping is taking a loan out against your own property. This might include a mortgage, second mortgage, or HELOC (home equity line of credit).
- Helps to Facilitate Continued Use of Asset: If you are an investor who engages in equity stripping, then you can reduce the attraction of an asset and still be able to use it. For example, you can equity strip your home, but continue to live in it, or as an owner of a multifamily building, you can keep collecting the rent.
- Makes Property Less Attractive to Creditors: If creditors do not get their money back, they will lose it all, so to avoid this, most of the time only those who have collateral will be given a loan. Using assets, such as your home, vehicle or cash, is a common method of collateral. This brings us to probably one of the most common reasons for equity stripping...to make your property look unattractive to creditors. By equity stripping, creditors will not look to come after assets because there is no cash equity available.
Disadvantages of Equity Stripping
- Requires Debt: There is not really a way around this, but you will have to put yourself into debt in order to actually strip your equity. This can be a bit stressful for some people. Essentially, this also means you will give a third party a potential claim to the asset as a form of collateral because you are getting a loan from them.
- It is Risky: Giving a third party claim to your assets is not a for sure solution of deterring a creditor. If the creditor is aggressive, they still may be able to obtain the asset.
- Predatory Lending: Equity stripping can also be a term for a predatory lending. This is where an investor may buy a distressed property, then lease it back to them. This is typically tied to a foreclosure scheme, in order to get a property for a low price. This is illegal.
Is Equity Stripping Legal?
Equity stripping makes your assets less desirable to go after and makes you less desirable to sue. Essentially, you will appear to own less than you actually do. Although you may wonder if this is ethical or legal. The answer is yes, it is legal. Simply be sure to set up everything before the creditor begins pursuing you.