Sale to Friendly Third Party

Many debtors consider selling their residence to protect the equity. However, they may not want to actually move out. To accommodate these conflicting desires, the sale and leaseback of the residence to a friendly third-party on a deferred installment note may be the solution.

Under this structure, the debtor sells the residence to a friendly party and takes back a promissory note. The promissory note is usually structured as a long-term balloon note. The debtor then leases the property back from the buyer and continues to live in his old house. Instead of owning a house, the debtor now owns a promissory note, an asset that is a lot less desirable to a creditor.

This structure works only so long as the debtor can establish the legitimacy and the arm’s-length nature of the sale. Income tax consequences of the sale, and possible property tax consequences on the transfer of ownership should be considered.

Outright Sale

An arm’s-length cash sale is the best way to protect the residence (and the equity in the residence) because it is much easier to protect liquid assets (sale proceeds) than real estate. While this technique affords the best possible protection, it is also the most radical and may result in additional income taxes.

Posted in: Commonly Used Structures