WHAT IS Spousal Stripping
Spousal stripping is an equity-stripping technique used to reduce the equity in a property in order to avoid foreclosure by creditors. Spousal stripping is simply the process of quit-claiming the title of a property to a spouse in order to transfer ownership and protect the asset from creditors.
BREAKING DOWN Spousal Stripping
Spousal stripping is one of the most common methods used to strip equity from a property to avoid creditors. The process is simple. A homeowner files a document known as a quit-claim deed with the local government property division, that transfers ownership of a property to another person. In this case, a spouse with debt files a quit-claim deed to the other spouse who does not have debt. The debt-holding spouse’s creditors cannot legally take the property from the new sole owner as payment for another person’s debt, but because they are married, the debt-holding spouse can continue to live in the house. Because this process is simple, it can feel like a way to avoid paying off debt, but it does not guarantee protection of the asset.
Risks of Spousal Stripping
The most obvious reason for the popularity of spousal stripping is that it is very cost-efficient and relatively easy to do. Filing a quit-claim deed can cost anywhere from nothing to a few hundred dollars, depending on locale, and is simply a matter of filling out a form and registering it with the local government. However, spousal stripping is often an ineffective strategy because it is easily-detected and does not protect the debtor spouse from creditors.
A quit-claim deed does not invalidate a mortgage or other liens on the house. So if Spouse A owes a balance on the mortgage, quit-claiming the house to Spouse B does not mean that the balance does not have to be paid and that Spouse B owns the house free and clear. Either Spouse A must pay the balance of the mortgage in full, as if they had sold the house, or Spouse B must take out a new mortgage to be able to pay off the balance of the original mortgage.
Another risk of spousal stripping is that if the couple gets divorced, the spouse to whom the property has been quit-claimed has the legal right to the house free and clear, regardless of any money still owed on the house. A person may quit-claim the deed on the house to a spouse for protection from creditors, only to lose the house to the spouse if they divorce.