How to Protect Real Estate From Creditors

Protecting real estate after a lawsuit is filed against you is relatively difficult. Creditor collection remedies targeting real estate are easy and effective, and that real estate is fixed in place and cannot be moved beyond the jurisdiction of the court enforcing a judgment.

The creditor’s recording of a final judgment in any Florida county imposes a lien on all non-exempt real property in the county that has the debtor’s name on the property title. The lien cannot attach to exempt homestead property or to property owned as tenants by entireties when only one spouse is the judgment debtor. The creditor does not have to find and specify property in order for the lien to attach—lien attachment is automatic.

Personal Property Comparison

A lien against real property is easy and effective compared to the creditor’s collection of intangible personal property, each of which first has to be discovered and second has to be attacked using statutory collection procedures such as garnishment, replevin, or supplementary proceedings. These procedures require time and legal fees.

Making collection more difficult, debtors can move or convert intangible personal property to protect that property from judgment collection. Examples are moving cash to an offshore trust or U.S. banks immune from garnishment, or by quickly liquidating marketable securities or motor vehicles and removing the proceeds from a creditor’s reach.

Real property cannot be relocated, and the sale of real property typically takes several months. It is often not possible to market and sell real property after a lawsuit and before a recorded judgment lien attaches to the property.

Options for Real Property

Some debtors attempt to protect their real property by transferring title to another family member or a family trust as soon as a lawsuit is begun. Such transfers, post-suit, or even pre-suit following notice of a claim, are subject to being reversed as fraudulent transfers. The family member or trustee who is the transferee will be named as a defendant in the fraudulent transfer action, and he may have to retain his own attorney.

There are primarily two ways to protect non-exempt real estate after the filing of a lawsuit: (1) sell the property or (2) reduce the equity in the property.

Selling the Property

The first method is to sell the property. The sale should be to an unrelated buyer before a judgment is entered and recorded on the public record. The cash proceeds from the sale are easier to protect that the real estate. But, as mentioned, marketing and selling to an unrelated party at market value takes time.

Reducing the Equity

Another option is to mortgage the property to secure a new loan. A mortgage loan will not protect the entire property value because no lender will extend a loan for one hundred percent of the appraised value, and most are limited to about 50 to 80 percent of the home’s value.

The mortgage proceeds can be invested in a better-protected asset. It is easier and quicker for a debtor with good credit to borrow against a property than to sell the property, and the debtor retains the property for future use and appreciation.

Offshore asset protection can provide a useful tool to shield real property from judgments with equity reduction. A debtor can utilize a combination of an offshore asset protection trust and a loan from a foreign lender. The debtor first sets up an offshore trust with an offshore trustee. Next, the trustee applies to a foreign lender for a secured loan. The loan proceeds can be deposited in a financial account owned by the offshore trust. The trustee can use the loan proceeds to purchase a certificate of deposit at the lender or comparable foreign financial institution.

The trustee pledges both the U.S. real estate and the CD instrument as security. Having both real property and a CD as security, the foreign lenders usually will lend up to ninety percent of the real estate’s fair market value. The mortgage will shield the property from a subsequent domestic judgment. Foreign banks pay higher CD interest rates than do U.S. banks, and the foreign CD interest earned usually covers most, if not all, of the mortgage interest expenses.

Offshore asset protection is effective, but it is also legally complicated and must be implemented with the assistance of an attorney experienced in the area.