Fact: Creditors Want Your Equity
Did you know lawsuits don’t need to be resolved with strictly monetary settlements? Creditors can and will attempt to take away your equity as a form of compensation, essentially stealing everything you’ve worked so hard to build.
Once a lawsuit is in motion, the plaintiff can opt to receive equity and there’s nothing you can do to prevent it. What you can do is hide your equity altogether, making it a less attractive form of compensation. What they don’t know can’t hurt you.
Defense #1: Take Out a True Mortgage
This strategy allows you to extract your money from the property. However, there are several drawbacks that make this less than ideal. For one thing, you have to go through the actual process which can suck up a lot of your valuable time. Then there’s the closing costs. And you also need to factor in regular interest payments, which drops the return on your investment.
So why bother, right? Well, in some cases the upside can offset these costs. That said, there are other ways of protecting your equity.
Defense #2: Open a Home Equity Line of Credit
This technique should be considered as a first line of defense. While it will hide your equity from unwanted scrutiny, it won’t protect you in the event of an actual lawsuit (more about lawsuits here). It’s an effective deterrent, but that’s about it.
The good news is getting a home equity line of credit is fairly straightforward (learn more here). This isn’t a major hurdle and definitely warrants consideration as a component of your asset protection plan.
Defense #3: Establish a Mortgage Company
This may sound complex and over the top, but it’s really not. The purpose isn’t to have commercial clients. Instead, you simply want to issue a mortgage to yourself.
This tactic creates an additional layer of separation and allows you to establish a no-cost mortgage to yourself. The recording and attorney fees to setup the company are going to be much lower than a bank mortgage over time and you get all the benefits without incurring long-term expense.
The best part of this is in the event of a lawsuit, you won’t need to pay off the mortgage before a creditor collects, allowing you to retain your equity through the mortgage itself.