HELOCs as an Asset Protection Device
On my previous blog entry about HELOCs I forgot to mention a pretty important point.
You use a HELOC as an Asset Protection Strategy. Suppose someone decides they want to sue you. The first thing that happens when they go to a lawyer is the lawyer runs an asset check against you. He finds you own several properties. If you have 20% equity on each property, the lawyer is much more likely to take on the case for free without a retainer. However, if you’ve mortgaged them to the hilt, he’s going to ask for a big retainer and the likelyhood of a frivilous lawsuit drops dramatically.
Thats where a HELOC comes in. If you’ve put 20% down on a property, you atleast want to put a HELOC on it so that it APPEARS as if you have a 2nd loan. You may not have drawn a penny out of it but on paper it looks as if you’ve taken that money out.
Besides, if you do get sued, you can use the HELOC to pay for your attorney’s fees!
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December 15th, 2005 at 2:27 pm
Creative way to look at it
February 17th, 2006 at 6:42 am
In most states there are Homestead protection acts that protect your primary residence up to a limit (ussually $500,000 of equity).
In those cases HELOC are not such a good idea for assett protection.
Also, if you get money out of a HELOC and invest elsewhere, money outside of the primary residence IS NOT PROTECTED by Homestead Protection Acts.
money And Investing
February 17th, 2006 at 10:26 am
Florida and maybe Texas have unlimited Homestead protection. California only has 150k.
As far as I know most states do NOT have unlimited protection. besides, you can put a heloc on it and not withdraw any cash out of it. the idea is to appear fully leveraged. if you have 500k in equity in your home, a lawyer doing an asset search on you probably knows you’re wealthy.
May 8th, 2007 at 10:27 am
That’s creative…if I ever live in a non-Homestead protected state I will give it some thought. I have a home equity loan out on my house with very little on it as a second safety net behind an emergency savings account.