Equity Stripping

Equity stripping is the process of encumbering a hard asset with debt, so that it cannot be attacked by other creditors. The hard asset is encumbered with debt by having liens filed against it as a security interest or collateral for a loan or promissory note. To understand why filing liens is effective, let us discuss what liens are and how they work.

A lien is used.

If a mechanic foreclosed on his mechanic's lien and sold your home and your home was sold for $100,000 at an auction. Will the mechanic get $100,000? No, he gets $4,000.  This is the debt which is owed to him. Before he collects his $4,000, however, the debts of all other lien holders who placed liens on the property prior to his first get their debts satisfied. So if the first lien holder is a mortgage company, and you still owe them $60,000 for the house, they would get their $60,000 before the repairman would get his $4,000.

Now this is where things get interesting. If there were liens worth more than $100,000 against this home that was sold for $100,000 and all of these liens were filed before the repairman's $4,000 lien the repairman would get nothing. He wouldn't get a dime, because all of the money went to other lien-holders and there is nothing left over for him to claim.

Now let's talk more about how a lien could protect your home. What if all of the equity in your home was liened up (i.e. stripped of equity), so that no equity was exposed to the attachment of a subsequent lien?

For example, Joe Repairman wanted to file a lien against your home for $4,000, but your home already has a $60,000 mortgage lien on it (your home loan), and a $50,000 lien placed on it by another entity. He would have NO REASON to file a lien or foreclose on your home, because he wouldn't get a dime for doing so, since the companies that had already filed liens against your home would receive all of the money proceeding from the sale.

Of course, for this lien to be effective, it has to be done correctly, and of course it is vastly preferable to equity strip your home in a manner that won't cost you tens of thousands of dollars in loan interest payments.

This is where PF Shield can assist you. You will most likely incur an additional $25-50 for a paralegal, or $150-200 to an attorney, in addition to PF Shield's standard fee, to make sure the lien complies with your state's laws.

After reading this page (or if you are already familiar with equity stripping) be sure to read our Multi-Stage Equity Stripping article.