If you are interested in protecting your property from creditors, you have a lot of options. I can’t write about every option that’s out there, but I’ll talk about a couple common techniques and a general strategy overview. By the way, in this case we are talking about real property as opposed to other types of property.
Beyond the basics of getting the right types and amounts of insurance in place, the goal is to make your property unattractive to creditors. I don’t mean fill your yard up with discarded toilets and old car parts. To protect your property, you want to make your property an asset that is not worth taking.
Creditors want to get paid. If you were someday to have a creditor come after you, you’re in a better position if a creditor can’t get paid easily. They can only get paid based on the available equity in your property.
If a creditor were to take your property, they would have to organize an auction, sell the property, pay any existing creditors (like a mortgage lender), and then any remaining money would go to the creditor.
The key to protect your property from creditors, is to reduce the amount of available equity. You can accomplish this through a number of different techniques. Some of these include: take advantage of your state’s homestead laws. Most states protect a certain amount of equity for your primary residence. Texas and Florida, for example, protect all equity. This reduces the available equity to a creditor down to $0. Most states offer a set amount of equity that is protected. In Washington state, the current amount is $125,000.
You can reduce equity in your home by borrowing money against the value of the available equity. A home equity line of credit (HELOC) is a common way to do that. Having a HELOC lien against your home makes your property less attractive to a potential creditor. If an attorney is looking up your assets in an effort to decide whether to sue you or not, seeing existing creditors already in line to get paid (see auction talk above) makes them less likely to sue you.
Finally you can put your property in a protective entity such as an asset protection trust or LLC. These types of entities put barriers between potential creditors and their dreams of getting paid. These barriers make it harder to get paid and therefore your property is a less attractive asset to them. No yard toilet required.
Colin Ley is an asset protection attorney and the creator of the PREP Trust® and Better LLC™. He is also the co-founder of LayRoots (along with with partner in life & business – Shreya Ley)
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