A foreclosure is legal action wherein a creditor can repossess a borrower’s property in the event that they default on a loan that was attached to the property. When a creditor or lender takes possession of a borrower’s property due to mortgage default, they may auction the property off at a foreclosure sale in order to recoup the proceeds.
Part of this foreclosure process may involve selling the borrower’s assets as well. This can happen when the amount that the foreclosed property is sold for at auction does not cover the remaining balance of debt still owed by the borrower on the property. To make up for the missing payments, the creditor may sell some of a borrower’s assets. A creditor can do this by obtaining a deficiency judgment from the court.
Briefly, a deficiency judgment is a type of judgment that is issued by a court on behalf of a creditor, which compels a borrower to pay their debts. Depending on the circumstances, a creditor may also be able to place a lien against some of the borrower’s other properties aside from their home.
Thus, you may want to consult with a local foreclosure lawyer if a creditor has or is about to foreclose on your property. A lawyer can discuss various methods you can use to protect your assets from being seized by a creditor during foreclosure and can ensure that your rights are not violated in the process.
Different Ways to Protect Your Assets
The laws surrounding the foreclosure process tend to vary from state to state. Thus, it is very important that a property owner be made aware of their rights under the law in their jurisdiction prior to the foreclosure action commences. In many instances, the sooner that a property owner takes action to protect their assets during foreclosure, the higher their chances are of obtaining protection for some of their assets.
The term protection should not be conflated with concealed in this scenario. Protection means that the assets are protected under the law or a legal procedure, whereas conceal means that the owner may be hiding the assets in an improper manner or in a way that is considered to be illegal. When an owner attempts to conceal their assets from a creditor, it is known as a fraudulent transfer.
Some examples of a fraudulent transfer or conveyance may include when:
- The cost to transfer an asset is much lower than the standard market price;
- The asset is transferred by an owner that is insolvent, but they do not receive any funds in exchange for the asset;
- The way in which the asset is conveyed violates public policy (i.e., constructive fraud); or
- The conveyance results in the owner being left with minimal assets right before they are about to incur debt or become insolvent.
There are some lawful means that a property owner can use to protect their assets during foreclosure. Some common examples of how a property owner may go about doing this may include the following:
- Form a limited liability company (LLC): In certain situations, a borrower may be able to invest their assets in a new business by forming an LLC. This way they can place the assets in the company’s name, which will keep them out of reach from creditors. The borrower can also form other types of businesses, so long as the business is not a partnership or a sole proprietorship.
- Borrowers who are interested in this option should speak with a local foreclosure lawyer. A lawyer can make sure that the company is properly formed and that a borrower’s assets are legally protected. It should be noted that this option may not be ideal for every borrower.
- Claim all exemptions: Each state has a list of property and/or assets that a borrower can claim as an exemption. An exemption can help a borrower protect up to a certain dollar amount of their property and assets. Some states even provide an itemized list of property exemptions. For example, many states allow a borrower to claim an exemption for assets stored in a 401k or an IRA account.
- Thus, a borrower may be able to use such exemptions to their advantage by investing in exempt forms of property in case a foreclosure action arises in the future. A few other examples of the types of exemption property that a borrower may want to consider investing in include a pension fund, Social Security benefits, an ERISA fund, and life insurance. These will vary by state.
- Set up a trust fund: There are certain types of trusts that may provide protection for assets that are owned by a borrower, but are intended to be distributed to their beneficiaries like a child or a grandchild. Trusts are one of the safest methods to use to protect assets that are meant for a borrower’s beneficiaries.
- There is one downside, however, which is that it can be expensive and time consuming to set up a trust fund. Though in the end it may be worth it if it keeps a borrower’s assets safe during foreclosure.
- Start an offshore account: Although offshore accounts themselves are considered legal, they are often associated with criminals and criminal activity. Therefore, a borrower must be very careful in opening up one of these accounts. A borrower must comply with any and all financial laws as well as pay for any taxes an account accrues. Alternatively, a borrower may want to consider setting up a foreign corporation or trust instead.
- A borrower who chooses to use an offshore account or other foreign investment vehicle to protect their assets during foreclosure, should contact a local foreclosure lawyer before initiating the transaction.
Do You Need Legal Advice?
As previously mentioned, there are a number of different methods that you may be able to use to protect certain assets during a foreclosure, ranging from setting up a trust fund to opening an offshore account. However, the requirements for protecting one’s assets during a foreclosure action will depend on which method you choose as well as the laws surrounding a particular method.
For instance, it is generally recommended that you hire a lawyer to set up a trust for securer asset protection. The creation of a trust also happens to be the most legally complex step in the process.
On the other hand, you do not necessarily need to hire an attorney to form an LLC, which can then be used to protect your assets. Though you may want to consult an attorney if you have any questions about starting an LLC for the purposes of protecting your assets.
Thus, it may be in your best interest to hire a local foreclosure lawyer if you need assistance with any of the various methods discussed in order to protect your assets during foreclosure. An experienced foreclosure lawyer will be able to provide further guidance on alternative options and can advise you on which option may be best suited to your needs.
Your lawyer will also be able to explain how each of these options may protect your assets during a foreclosure and can inform you of your rights over those assets under the relevant laws in your jurisdiction. In addition, if you require legal assistance with the entire foreclosure process, your lawyer will be able to provide these services as well.