This Business News Story Was Uncovered By Us From: https://www.under30ceo.com/equity-stripping-balance-sheet/
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There is a tempest of misinformation about equity stripping, a process often vilified online as a clandestine method of “hiding assets.” However, the truth is much more serious. When properly done, equity stripping is a legitimate process of legal “balance sheet engineering,” not a nefarious process of hiding assets. This is important because it is a matter of truth versus myth, legitimacy versus illegitimacy, and reality versus fantasy.
Essentially, equity stripping is a process of structuring legitimate obligations so that a company’s balance sheet reflects true economic realities while minimizing risk of creditor claims. When not done properly, any process is suspect. When done properly, using secured promissory notes, perfected security interests, and arms-length, commercially reasonable negotiations, equity stripping is a legitimate process that courts routinely uphold. Experts explain that equity stripping is a legitimate process that reduces paper equity in valuable assets using legitimate, legal, and lawful encumbrances. That is a legitimate process.
However, the misnomer of equity stripping as “hiding” misses the mark on the mechanics as well as the checks in place. The cornerstone of the process is the promissory note, as well as the Uniform Commercial Code (UCC) in the United States, which deals with secured transactions. These are traditional concepts in law that establish secured obligations, as well as creditor priorities.
It is important to remember that the court, be it in probate court or bankruptcy court, is not concerned with the “equity” in the situation, per se, but with the documentation of the security interest, as well as its reasonableness. Therefore, the mechanics of the promissory note, as well as the Uniform Commercial Code, are important considerations for those wishing to include equity stripping”in the asset protection strategy.
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