Yes, there is such a thing as a “Friendly Lien”. This is a lien against your property held by a party who is friendly to you. Ideally the “friendly party” is an LLC or corporation created in a jurisdiction (like Wyoming or Nevada) that allows you to use a nominee to make your involvement with the business anonymous.
The friendly lien will prevent potential litigants and creditors from pursuing the property since it’s encumbered. No sane lawyer will dive into a lawsuit before crunching the numbers. After all, why waste time trying to get a favorable judgment if you can’t get paid? This is why a friendly lien is a great addition to your asset protection toolbox. The lien will help make your property less attractive to predators.
But here’s the rub. It’s not foolproof and you can still lose your shirt if you don’t do it the right way.
Friendly Liens Can Go Bad
You need to file a friendly lien the right way to avoid running afoul of the law. Offering a counterfeit lien or false instrument for recording can land you in the slammer in many states. Civil courts refer to it as “slander of title” and issue hefty fines for such actions.
So, what exactly is a bad lien? This is a lien that lacks economic substance. For instance, you shouldn’t claim that your LLC loaned you some money when it, in fact, did not. The IRS and the court system won’t be forgiving. And you’d better hope you look good in black and white stripes if you go this route. Criminal penalties can include jail sentences of two to three years.
Using Friendly Liens the Right Way
You need to get a few things right to keep your property safe when using friendly liens. Unless, of course, your intention is to use the lien to obfuscate or defraud, in which case nothing will protect you from the law.
- The lien must reflect the substance of the transaction. If an LLC you’ve created files a friendly lien against your property, make sure the lien is structured as an Equity Line of Credit (ELOC) and not a loan. ELOC transactions usually involve lending party agreeing to lend an amount of money upon demand by the borrower.
- Your LLC must have the funds for the loan available.
- Liens must be recorded. Drafting a promissory note for the LLC is also vital. The LLC must be set up in commercially reasonable terms.
It’s Only a Smokescreen
The friendly lien only acts as a smokescreen. It will definitely not protect you from creditors coming to collect. If you have not actually borrowed any money from the LLC, then a friendly lien becomes a meaningless document. This is why we recommend a multi-pronged approach to asset protection for rental property owners.