The Appeal of Friendly Liens in Asset Protection
In recent discussions about asset protection strategies, the concept of “friendly liens”—also known as “equity stripping”—has garnered significant attention. This approach involves placing a lien against your property, typically real estate, held by a corporation or LLC that you control, often established in favorable jurisdictions like Nevada or Wyoming. The premise is to create an encumbrance on your property, ostensibly making it less appealing to creditors or plaintiffs seeking litigation.
What Are Friendly Liens?
In theory, a friendly lien is designed to deter creditors by obscuring the equity you hold in your property. For instance, if a property is encumbered with a lien equal to its market value, creditors may find pursuing the property less attractive, assuming there is no equity to recover. The idea is that if the financial numbers don’t add up favorably for creditors, they may settle for a lesser amount rather than engage in costly litigation.
While this may sound like an effective deterrent, courts have repeatedly invalidated such strategies, especially when they lack a legitimate financial purpose.
The Reality: Backing by Real Value Is Essential
While a friendly lien may seem advantageous if executed properly, it must be supported by a legitimate exchange of value. If you set up a Wyoming LLC that holds a lien on your home for a significant amount, such as $1 million, there must be proper documentation proving that a valid exchange occurred.
If no actual transaction took place, courts will void the lien as fraudulent, exposing your assets to creditors.
Example: If a creditor challenges this setup, they can argue that the lien is fraudulent. In many jurisdictions, presenting a false lien can be classified as slander of title, resulting in hefty fines and potential civil penalties.
Legal Pitfalls of Friendly Liens & Equity Stripping
Using friendly liens can violate fraudulent transfer laws under 740 ILCS 160/5(a) and similar state statutes. Courts routinely strike down these asset protection methods when intent to hinder, delay, or defraud creditors is evident.
Key Court Rulings Against Fraudulent Transfers
1. Actual Intent to Hinder, Delay, or Defraud Creditors
Courts analyze badges of fraud—indicators that a transfer was made to intentionally shield assets from creditors.
• In re Eckert, 388 B.R. 813 (2008)
The court ruled that a debtor admitting via email that he transferred assets to keep them away from creditors was direct evidence of fraud.
• Grochocinski v. Schlossberg, 402 B.R. 825 (2009)
A debtor transferred his home to a family member, kept control of the property, and received no legitimate exchange of value. The court voided the transfer, emphasizing that fraudulent intent is presumed when there is no real financial justification.
• In re H. King & Associates, 295 B.R. 246 (2003)
The court ruled that badges of fraud, such as transfers to insiders and concealment of the true nature of the transaction, make it likely that a transfer will be undone.
2. Lack of Reasonably Equivalent Value in Transfers
Courts routinely strike down transactions where the debtor does not receive fair market value in return for an asset transfer.
• In re Phillips, 379 B.R. 765 (2007)
The court held that voluntary transfers without receiving reasonably equivalent value are constructively fraudulent.
• In re Wylie, 665 B.R. 144 (2024)
A debtor transferred real property to his mother, claiming it satisfied a previous debt, but the court ruled the value of the debt was not equal to the property transferred, making it fraudulent.
• Image Masters, Inc. v. Chase Home Finance, 489 B.R. 375 (2013)
The court established a two-step test for fraudulent transfers:
1. Did the debtor receive any value from the transaction?
2. Was the value received roughly equivalent to what was given?
If a lien does not reflect a legitimate debt, the court will disregard it.
The IRS & Friendly Liens: A Recipe for Trouble
The Internal Revenue Service (IRS) does not look favorably on individuals who attempt to use friendly liens to obscure assets or delay enforcement of tax liabilities. Engaging in such strategies could lead to serious tax fraud investigations, substantial fines, and even criminal charges.
Example: The IRS has historically targeted individuals who create fictitious business loans or friendly liens that serve no real financial purpose. If a court determines that an LLC lien on personal property was merely a paper transaction, the entire arrangement can be disregarded, exposing assets to tax liability and creditor claims.
Why Friendly Liens & Equity Stripping Are Not Effective Asset Protection Strategies
Courts have repeatedly ruled against these tactics for the following reasons:
❌ Transfers to insiders (family members, business partners) raise immediate suspicion.
❌ Debtors often remain in control of the asset, showing fraudulent intent.
❌ There is usually no legitimate financial purpose for the transfer.
❌ Friendly liens often do not reflect real, arm’s length debt obligations.
❌ Equity stripping makes assets look encumbered but provides no real exchange of value.
❌ One the equity is stripped, it cannot be placed in a U.S. bank account that judges can frieze.
If a transfer is deemed fraudulent, courts undo the transaction, and creditors gain access to the assets. Worse, debtors can face punitive damages, sanctions, and court costs.
Legitimate Asset Protection: What Actually Works
Instead of risky, court-rejected tactics, high-net-worth individuals should implement proven legal strategies:
✅ Offshore Asset Protection Trusts (Cook Islands) – These trusts have stood up in court and offer strong creditor protection.
✅ Hybrid Asset Protection Trusts – Trusts like The Bridge Trust that are offshore trusts which are domesticated in the U.S. for tax purposes provide lawsuit protection without violating fraudulent transfer laws.
✅ LLCs & Limited Partnerships (LPs) – Properly structured entities are a great first layer of protection and help shield personal assets without fraudulent intent.
Conclusion: A Smokescreen, Not a Shield
While friendly liens and equity stripping may appear to offer protection, they fail under legal scrutiny. Courts have repeatedly struck down these methods as fraudulent, ineffective, and legally voidable.
If you are serious about protecting your wealth, work with an experienced asset protection attorney to build a legally sound, enforceable strategy that will stand up in court.
📞 Schedule an Asset Protection Analysis today with Bradley Legal Corp. and secure your financial future—the right way (888) 773-9399.
By: Brian T. Bradley, Esq.
