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Principal stripping involves transferring the principal of an asset to a third party to make it unattractive to potential creditors seeking payment. This can be used as an investment strategy, but advanced planning is essential to avoid fraud charges. Companies can also use principal reduction plans to protect assets against potential lawsuits.
Principal stripping is an investment strategy in which the owner of an asset continually borrows or transfers the principal of an asset, making it of no value to potential lawyers initiating legal proceedings to recover a judgment or make the asset may not be attractive to creditors seeking payment due to defaults. Essentially, the method works by transferring the majority interest in the asset to a third party, while the owner of the asset uses the funds exchanged for the estate to make other investments. The successful reinvestment of funds paid to transfer the estate is intended to exceed the interest payable on the principal loan. This allows the owner of the asset to have control over the cash flow associated with the asset, while retaining the use of the asset. Most often, asset stripping is leveraged on foreclosed property or freehold property.
Asset protection to retain rights of use is sometimes the primary concern when taking advantage of capital stripping. There are several ways to accomplish this, but it almost always boils down to transferring the principal elsewhere for cash. Home equity lines of credit are one way this is accomplished, while transferring ownership to someone else is another, for example, by assigning the asset to a spouse, called spousal dispossession. Although often used as a tactic to avoid creditors, however, removing principal is also an effective form of investment.
Companies in particular can take advantage of principal removal to help protect assets against potential lawsuits, through what is known as a principal reduction plan. Also, equity is often considered non-performing if it is idle; therefore, equity does not proactively contribute to the business. In addition to property, companies also have equity in accounts receivable, inventory, patents, trademarks, and equipment. Transferring equity in these assets allows the business owner to leverage the capital in the form of cash to make other investments, such as growing the business, while making these assets appear worthless in the event of legal proceedings. Additional individuals and entities holding a controlling interest in such assets complicates the process of securing a judgment against those assets, and in many cases makes it impossible.
However, advanced planning is essential for equity removal to work effectively. Individuals or companies that attempt to take advantage of the techniques after legal proceedings are initiated will typically face fraud charges by the court and likely lose use of the asset, as well as incur criminal proceedings. Advance strategy planning can benefit both businesses and individuals by keeping wealth constantly working to accumulate more wealth for the asset owner.
Smart Asset.
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