Let’s say someone sues you and you lose the lawsuit. Can they take your house? Sadly, the answer is yes. A plaintiff can claim your home if you don’t have access to liquid assets such as cash in the bank, stocks, or an equivalent. So, depending on where you live, the court may force the sale of your house to pay the judgment.
This situation is dangerous for anyone who has a lot of equity in their home and a large judgment against them. However, there are ways to protect your home against aggressive lawyers and creditors.
We’ve put together this guide to show you exactly how someone can take your house and what you can do to prevent that from happening:
- How You Can Lose Your House in a Lawsuit
- Examples of People Having Their Houses Taken in a Lawsuit
- How to Avoid Losing Your House in a Lawsuit
- How to Protect Your Properties After a Lawsuit
- Pay Your Mortgage to Protect Your House
- Set Up Home Protection Before Trouble Arrives
How You Can Lose Your House in a Lawsuit
Imagine this: You lose a lawsuit unexpectedly, and now your opponent is ready to request a judgment against you. What happens next?
If you cannot afford to pay, your creditor can record the judgment in the county that houses your property. This creates a lien on your property and turns the judgment from an unsecured debt to a secured debt. Once there is a lien on your home, you cannot sell or refinance the property without paying the lien.
To make matters more difficult, the opposing attorney often works on contingency, and will not get paid until you fork over the cash. They have a motive to obtain legal recourse for your nonpayment of the debt and will often rush the repayment of the lien.
If you have enough equity in your home to cover the judgment, there’s a high chance that you’ll be evicted and your creditor will sell 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 taken to a storage unit. In most instances, you must cover the cost of such an action in addition to the existing costs of the judgment, or your possessions will be sold to pay for the process.
Examples of People Having Their Houses Taken in a Lawsuit
You may think that you’d never end up in a situation that causes you to lose your home. However, this outcome is more likely than you might think. To show you just how easy it is for someone to take your home in a lawsuit, we’ve put together two real-life examples of how it can happen:
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 a $1.1 million judgment for an automobile accident. The one who lost the lawsuit had $500,000 of automobile insurance. But the judgment was for $1.6 million—$1.1 million more than the liability limits of the insurance policy.
The homeowner did not have the $1.1 million in cash, so the creditor’s attorney recorded the judgment in the county where the judgment debtor’s home was located. The attorney then foreclosed on the judgment. The creditor, in turn, took possession of the debtor’s home to pay some or all of the judgment.
The moral of the story is that you can lose a lot in a lawsuit. Someone can take your house, your car, your bank account, and even your life savings. Should you lose a court battle, the opposing attorney can force you to divulge everything you own.
How to Avoid Losing Your House in a Lawsuit
Fortunately, there are ways to prevent someone from taking your house after a lawsuit. Some of them are only available to residents of certain states, while others can be used by everyone. Here are just a few of the ways that you can prevent someone from getting their hands on your home:
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. Every state protects homesteads differently, so it’s worth doing a search for Homestead Exemptions by State to find out how much protection your state offers.
To keep you from having to do too much searching, we’ve assembled an overview of some states’ homestead laws:
- States that don’t protect equity: New Jersey and Pennsylvania.
- Locations that protect unlimited equity: Arkansas, Washington D.C., Florida, Iowa, Kansas, Oklahoma, South Dakota, Texas, and Puerto Rico.
- States that protect under $100,000 of equity: Thirty of fifty states protect $100,000 of equity or less. Kentucky, Tennessee, and Virginia protect only $5,000 of equity as of this writing.
- States that protect over $100,000 of equity: California allows for a minimum homestead exemption of $300,000 to $600,000 adjusted for inflation, depending on the median home price in your county. This is much lower than the average cost of a home in the most populous counties.
Even in the states that protect unlimited equity, there are exceptions. For example, you can lose your home if you move to Florida and file for bankruptcy or your creditors force you into bankruptcy. You must have lived in Florida for at least 40 months before the homestead protection kicks in. Plus, if you are within the limits of a city, you cannot have more than half an acre to enjoy full protection. This amount grows to 160 acres if you live outside of a municipality.
In short, the homestead exemption is a useful way to protect your property. However, since most states don’t protect more than $100,000 worth of equity, it’s best to have additional safeguards for your home.
2. Equity stripping
Although your state’s laws for homestead protection depend on where you live, anyone can use the equity stripping strategy. To execute this strategy, we record equity lines of credit against your property. We call this “equity stripping” because it strips the value, or equity, from the property. This process creates a paper lien that is initially payable to an LLC inside an asset protection trust. After the paper lien is created, we can even havethird-party lenders purchase the liens to further separate you from the equity in your home. However, we rarely need to go that far.
As part of this strategy, we set up an asset protection trust. The lender then places the proceeds into an inaccessible account inside your asset protection trust and pays you interest on your proceeds. You will also have to pay interest on your loans, which shows the court that your loan is payable to a third-party lender. Essentially, this means that you have no equity in your home, having taken out a loan against it. Thus, the person who sued you is less likely to go after your house to execute their judgment.
3. Land trusts
A land trust is a privacy tool. It helps to prevent lawyers from linking you to the property you own. When someone brings a potential claim to a contingency fee attorney, the attorney typically performs an asset search on the potential defendant. If that potential defendant is you and the attorney sees no assets, it decreases the likelihood that the attorney will take the case. This is an excellent choice for high-net-worth individuals who have a higher risk of being subjected to frivolous lawsuits.
4. LLCs.
An LLC can provide mid-level asset protection, but that protection comes at a cost. Putting your home in an LLC can 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. Given the impacts an LLC can have on your tax benefits, we typically recommend a land trust instead.
In some cases, there are tax benefit exceptions for single-member LLCs. Additionally, married couples in community property states may be able to retain homeowner tax breaks after putting their residences into LLCs. Check with an attorney or CPA in your area to see if the LLC strategy will work.
How to Protect Your Properties After a Lawsuit
To protect rental properties or any other property that isn’t your primary residence, we will typically place each property into separate land trusts. We do this to make it hard for contingency fee lawyers to discover them. Once the property is in a land trust, we create an LLC that is listed as the beneficiary of the land trust.
Placing rental properties in an LLC works because many states offer “charging order” protection for LLCs. When someone sues a member of an LLC, there are protective provisions that prevent creditors from attaching judgments against company members to company ownership rights. In short, 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. This lien is called “charging order.” Keep in mind that most states require an LLC to have two or more members before offering the benefit of charging order protection.
Some states, such as Wyoming (our favorite in the U.S.), offer charging order protection if the LLC has only one member. The laws in Nevada, Delaware, South Dakota, and Alaska also include single-member LLC charging order protection.
For the strongest level of LLC protection, you need to establish your company in the Caribbean Island of Nevis or the Cook Islands in the South Pacific. These locations offer many of the benefits of domestic LLCs, combined with the inherent lawsuit defenses of an offshore jurisdiction.
Pay Your Mortgage to Protect Your House
There is one thing we can’t protect against: outstanding debt on your home. If there is a mortgage or lien against your house already, and the law grants your creditor the right to execute on that lien, there is little that can be done to keep your home.
You need to protect yourself before someone records the judgment. A mortgage is a secured debt. If you don’t pay it, the lender can seize your home as security.
Set Up Home Protection Before Trouble Arrives
If you end up in legal trouble and are at risk of losing your home, it’s best to have protection in place already. Most asset protection strategies are designed to be set up long before trouble arrives and activate when needed. If you set up your defenses too late, you risk everything. Don’t sit around waiting for problems to find you; be ready before they show up.
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 can help. Click the button below to schedule a free consultation.
