A friendly lien is simply a lien against property that you own that is held by a party or parties that is friendly to you. Some other terms used to describe this device are “friendly mortgage”, and “friendly loan.” The classic example of a friendly lien is as follows: If you borrow money from your parents and they place a lien on your home to secure repayment of the loan, that lien is friendly. Friendly liens are effective asset protection tools because a creditor that comes along after the friendly lien is in place will always be in a “junior position” to the lienholder. Some explanation follows…
How Liens Work
Liens upon property work on the principal that “first in time is first in right”–so a prior recorded lien is always “senior” to a subsequent lien–subsequent liens are always “junior” to the prior recorded liens–these lienholders are arranged in an order referred to as “priority.” This priority is important: if a sale of the property is ever forced, or if a creditor appears, the lienholders are entitled to receive the proceeds from the sale of the underlying property in the order of their priority.
In some cases, a piece of property can have 3, 4, or 5 liens on it. The lien holders thereby stand in priority in the order in which the liens were placed on the property. Bear in mind that a lien must be properly “perfected” to be legally effective, which means that the lien must be properly recorded so that the world has notice of the lien.
And so, a friendly lien achieves two important goals. First, it puts a friendly party in a superior position of priority to any creditor that comes along later. This means that the subsequent creditor (who may be aggressive or hostile) gets paid only if there are any assets left after the friendly lien is satisfied. The second important goal is simply that a friendly lien “encumbers” a property–it ties it up, and makes it look less attractive to an otherwise aggressive creditor.
Encumbered property is always less attractive to creditors. A creditor always “runs the numbers”–the decision to pursue litigation or collections is always an economic decision. If the economics are not beneficial, the creditor may not pursue the case, or will certainly accept less.
Where Friendly Liens Go Wrong
The big question with friendly liens is the following: how friendly can the lienholder be? Can it be my wife? Can it be a corporation that I secretly control? Friendly liens must be independent–they cannot be mere shams meant to frustrate creditors.
Many asset protection websites claim that you can protect your assets by forming your own Nevada Corporation and instructing the Nevada Corporation to place liens on your otherwise-exposed property. The websites further instruct that you can disguise or conceal your ownership in the Nevada Corporation through the use of appointed directors. Such a scheme will work only if undetected. If detected and exposed, the lien would be ignored, and the creditors could reach your property.
Creditors’ attorneys know this trick. In fact, the surest way to raise suspicion of a flimsy lien is to use your own Nevada Corporation to create a friendly lien. A creditor’s attorney that discovers such a lien in an asset search (which he or she can conduct on the internet in seconds, for about $25) and may choose to investigate further.
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Michael Spadaccini is the author of 8 books on self-help legal matters such as, Ultimate LLC Compliance Guide: Covers All 50 States (Ultimate Series), Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships, and Ultimate Guide to Forming an LLC in Any State, Second Edition (Ultimate Series).
You can view his Amazon Author Profile Here.