Let’s say someone sues you and you lose the lawsuit. Can someone take your house? If you do not have access to liquid assets (cash in the bank, stock or the equivalent), yes, it is possible. Depending on where you reside, the court can force the sale of your house to pay the judgment. So, it can be quite worrisome when you have a large judgment against you and you live in a home with a lot of equity. Now, a handful of states have meaningful homestead protection. This only applies to one primary residence. We’ll talk about this later.
So, first we’re going to answer the question, “How does somebody take your house in a lawsuit?” We’ll talk about some examples of people who lost their homes. Then we’ll talk about what you can do to protect your home from a lawsuit.
How Does Someone Take Your House?
Someone sues you. You lose the lawsuit. Thus, your opponent can ask for a judgment. You cannot afford the pay the judgment. So, the creditor can then record that judgment in the county where your property is located. Doing so, plus some possible additional filings, creates a lien on your property. So, once the judgment is recorded, the judgment goes from being an unsecured debt to a secured debt.
As a result, you will not be able to sell or refinance your home without paying the lien. Many times, the opposing attorney will not get paid until you fork over the cash. So, they have a motive to obtain legal recourse for your nonpayment of the debt. Suppose there is enough of a difference between the potential sales proceeds and what you already owed on the property. If so, the judgment creditor will likely take your house. That is, they can force the sale of your home, unless you live in a state that has sufficient homestead protection.
During this procedure, you will be evicted from your home. If you refuse to leave, a team of sheriffs and others will physically remove you. Your possessions will likely be placed on the sidewalk in front of the home or placed in a storage unit. In most instances, you will either need to cover the cost of such an action or your possessions will be sold to pay for the process.
So, that is why it is so important to put an asset protection plan in place before a judgment is recorded against your property. Feel free to view our video entitled Real Estate Asset Protection for more details.
Examples of People Getting Sued and Losing Their Homes
Example #1
Here’s a recent example from someone who called us too late. A homeowner did not pay the roofing contractor the final $2,500 listed in the contract. Thus, the roofer filed contractor’s lien. The judge gave the roofer a judgment. As a result, the homeowner ended up paying the $2,500 balance.
The problem is that the contract gave the roofer the right to attorney’s fees and court costs. That part amounted to $45,000. The courts gave the roofer the right to execute the lien unless the debtor paid the $45,000 balance.
The homeowners did not have the money. So, the roofer foreclosed and the family lost their home. Thus, the legal fight can often result in surprising consequences that can turn little problems into big ones. All of a sudden, the owner of the home was liable for over $45,000. The debtor had plenty of equity in the house. So, it was ripe for the taking.
Example #2
In another example, a property owner failed to pay $1.1 million judgment as a result of an automobile accident. The one who lost the lawsuit had $500,000 of automobile insurance. But the judgment was for $1.6 million or $1.1 million more than the liability limits of the insurance policy. The injured party was awarded a judgment for $1.6 million, of which $500,000 was covered by insurance.
The would-be client did not have the $1.1 million in cash. So, the creditor’s attorney recorded the judgment in the county where judgment debtor’s home was located. The attorney then foreclosed on the judgment. The creditor, in turn, took possession of the home to pay some or all of the judgment.
The moral to the story is that you can lose a lot in a lawsuit. Someone can take your house, your car, bank account and life savings. Should you lose a court battle, the opposing attorney can force you do divulge everything you own. So, you’ll likely lose money and property unless you protect yourself first.
What to Do So Someone Can’t Take Your House
1. Homestead exemption
If you live in a state that protects a significant amount of equity in your primary residence, you may be able to use this to protect your home. So, when you do a Google search for Homestead Exemptions by State you will find the amount of protection offered in each state. States such as New Jersey and Pennsylvania do not protect any of the equity in a primary residence. Arkansas, DC, Florida, Iowa, Kansas, Oklahoma, South Dakota, Texas and Puerto Rico have options for protecting unlimited amounts of equity.
Even in these states, there are exceptions, however. For example, if you move to Florida and file for bankruptcy, you must have lived in Florida for at least 40 months before the homestead protection kicks in. Plus, if you are within the city limits, you cannot have more than one-half acre; 160 acres if outside of a municipality.
Some states protect a paltry sum. Thirty of fifty states protect $100,000 of equity or less. Kentucky, Tennessee and Virginia protect only $5000 of equity as of this writing. California allows for a minimum homestead exemption of $300,000. They offer a maximum of the median sale price for a single-family home in the prior calendar year in the county in question to a maximum of $600,000. These amounts are adjusted for inflation each year. San Francisco county has a median home value of $1,649,655 as of this writing, according to Zillow. So, this can leave a significant amount of equity exposed. Some states increase the amounts for married couples.
2. Equity stripping
With the equity stripping strategy we record equity lines of credit against each property. We call this strategy “equity stripping” because it strips the value, or equity, from the property. This paper lien is initially payable to an LLC inside of an asset protection trust. Then for step number two, on rare occasions, we have 3rd party lenders who can purchase the liens.
We set up an asset protection trust. The lender places the proceeds into an inaccessible account inside of your asset protection trust. The lender pays you interest on your proceeds. You pay interest on your loans. This is usually a difference of about 1% to 1 1/2% annually. This way you can show the courts that the loans are truly payable to a 3rd party lender and you have received the proceeds in your trust. As a result, when someone sues you they won’t want to take your house. This is because this process removes its remaining value.
The strongest asset protection trusts are not in the US, but in powerfully strong jurisdictions with laws that favor the debtor. Some of the best examples are the Cook Islands trust and the Nevis trust. The Cook Islands authorities have told us that our organization has established more Cook Islands trusts for clients than any company worldwide.
3. Land trusts
A land trust is not an asset protection device but a privacy tool. Someone brings a potential claim to a contingency fee attorney. Rather than taking the case immediately, the attorney typically performs an asset search on the potential defendant. If that potential defendant is you and the attorney sees no assets, this decreases the likelihood that attorney will take the case. We have established literally thousands of land trusts. Call for details.
4. LLCs.
Whereas an LLC can provide mid-level asset protection, the problem is that putting a home into an LLC may possibly affect your home ownership tax benefits. This includes benefits such as selling your home and receiving $250,000 to $500,000 of the profits tax free. So that’s why for personal residences, we usually just use the land trust wherein you retain this tax benefit. There may be an exception for single-member LLCs. Plus, married couples in community property states may also be able to get away with putting their residences into LLCs and retaining the homeowner tax breaks. Check with an attorney or CPA in your area.
For rental properties, we will typically place them into land trusts for privacy of ownership. Then we make the LLC the beneficiary of the land trust. LLCs in many states offer “charging order” protection. That is, when someone sues a member of an LLC, there are protective provisions in most LLC statutes. The judgment creditor cannot take the LLC outright. All the creditor can do is record a lien in the member’s interest in the LLC. But the creditor cannot take the LLC or the asset inside. This lien is called charging order. In most states the LLC must have two or more members in order to enjoy charging order protection.
Some states, such as Wyoming (our favorite in the US) offer charging order protection if the LLC has only one member. States such as Nevada, Delaware, South Dakota and Alaska also have laws that have single-member LLC charging order protection. Even stronger than Wyoming is an offshore LLC in the Caribbean Island of Nevis, (KNEE-vuhs). We have established more Nevis LLCs for our clients than any company in the world.
Pay Your Mortgage Or They Can Take Your House
Here is what we cannot protect against. If there is a mortgage or lien against your house already, you’re up a creek without a paddle. You need to protect yourself before someone records the judgment. Moreover, you need to pay your mortgage. A mortgage is a secured debt. If you don’t pay it, the lender can seize your home as security. If you don’t pay a contractor, that contractor can record a lien unless you contact us first and we beat him to the punch. That is, asset protection is not something to sit around and head-scratch about. When you think you might need it, it’s usually time to act before it’s too late. And oh yeah, pay your mortgage.
Need Help?
Are you interested in setting up an asset protection plan to protect your home and other assets? We have attorneys and consultants on staff who may be able to help. Give us a call or fill out a free consultation form here on our website.
