Equity Stripping
What Is Equity Stripping?
Equity Stripping is a set of strategies intended to reduce overall equity in a property. Equity stripping strategies can be utilized by debtors as means of making properties ugly to creditors, as well as by predatory lenders hoping to exploit homeowners facing foreclosure.
Understanding Equity Stripping
Equity stripping is considered by some to be one of the simplest and best methods of asset protection against creditors, while others view the strategy just as a form of predatory lending.
The thought behind equity stripping as a asset protection strategy is that through decreasing interest in a property, creditors are discouraged from remembering the property for any claims against the debtor. By giving one more party a claim against a property, an owner can hold utilization of the property as well as control over cash flow while at the same time making the property an ugly asset to any creditor who may somehow endeavor to exercise a legal judgment against the property owner.
As a predatory lending mechanism, equity stripping is exercised against homeowners facing foreclosure. An investor purchases the property from the homeowner under threat of foreclosure and consents to lease the property back to the former owner, who may then keep on involving the property as a residence. Predatory investors frequently utilize this method to exploit property owners with limited resources and information.
Forms of Equity Stripping
Notwithstanding the strategies employed by predatory lenders, two of the most common equity stripping strategies are spousal stripping and home equity lines of credit (HELOC).
Spousal stripping is the most common way of shifting the title of a property into the name of a debtor's spouse. This strategy allows a debtor to file a quit-claim to the property for the sake of their spouse, who probably has no debt or little debt. While this strategy is certainly not an indestructible method of protecting property from creditors, it is a simple and open asset protection strategy for some homeowners overseeing critical debt.
Home equity lines of credit enable the owner to involve the equity in their home as a credit extension. A HELOC is a kind of a subsequent mortgage, utilizing the home equity, or the difference between the value of the home and the leftover mortgage balance, as the collateral on a credit extension. Funds in a HELOC function in comparative ways to a credit card. The bank giving the HELOC to a homeowner will give a number of roads to utilizing these funds, including a bank-gave credit card tied to the account. While HELOCs offer a few alluring benefits, including variable interest rates and, at times, low or no closing costs, they can likewise put borrowers in risk of losing the equity in their home.
Illustration of Equity Stripping
Assume a house is worth $500,000 and the owner can claim an exemption of $100,000 from the property. Without a mortgage, a creditor to the property holder could place a lien on the home amounting to $400,000, i.e., the excess not exactly the tax exemption. With a mortgage, nonetheless, the creditor can not place a lien for that amount due to the security interest that the lender of the mortgage is entitled to.
Features
- Equity stripping is an asset protection practice in which assets are protected by distributing interest in it to various gatherings.
- It is likewise viewed as a predatory lending practice since it assists creditors with lessening an owner's claim to a property by efficiently purchasing equity in it and controlling cash flow associated with the property.
- Spousal stripping and HELOC are two of the most common forms of equity stripping.
