Your Real Estate Could Be at Risk: Essential Legal Strategies to Protect Your Property From Creditors

When Maria came to my office last year, she was fighting back tears. A medical emergency had left her family drowning in bills, and now she faced a lawsuit that could force the sale of her Brooklyn home—the same home where she'd raised her children for over 20 years. "I never thought this could happen to me," she said. "I worked so hard to pay off the mortgage. How can they just take it away?"

Maria's story isn't unique. Middle-income families across Brooklyn, Queens, and Staten Island face similar fears every day. Whether it's unexpected medical expenses, business liabilities, or other financial setbacks, the threat of losing your most valuable asset—your home or investment property—to creditors is real and frightening.

The good news? You're not powerless. New York law offers several legitimate strategies to protect your real estate from creditors, but the key is understanding your options and acting proactively. Let me walk you through the most effective legal protections available, so you can make informed decisions about safeguarding your family's financial future.

Understanding the Threat: How Creditors Can Access Your Property

Before we dive into protection strategies, it's important to understand what you're up against. When a creditor wins a lawsuit against you, they receive a judgment—essentially a court order saying you owe them money. In New York, that judgment can become a lien on any real property you own.

Here's what keeps me up at night on behalf of my clients: creditors can search public property records and discover every piece of real estate in your name. Once they've identified your property, they can attach their judgment to it. While they typically can't force an immediate sale of your primary residence, that lien sits there like a ticking time bomb, preventing you from selling or refinancing until the debt is satisfied.

For investment properties or second homes, the situation can be even more precarious. Creditors may be able to force a sale more quickly to recover what they're owed.

Your First Line of Defense: New York's Homestead Exemption

Let's start with the protection that's already built into New York law. The homestead exemption shields a portion of your primary residence's equity from unsecured creditors.

As of 2024, the exemption amounts vary by county:

• High-cost areas (including Kings, Queens, New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam counties): $204,825

• Moderate-cost counties: $170,700

• All other counties: $102,400

If you're married and you and your spouse co-own your home, you can potentially double this protection.

Here's the practical reality: if a creditor wins a $100,000 judgment against you and your Brooklyn home has $150,000 in equity, the homestead exemption protects $204,825 of that equity. However, this protection has significant limitations you need to understand.

What the homestead exemption WON'T protect against:

• Mortgage foreclosures

• Property tax liens

• Unpaid child or spousal support

• Medicaid estate recovery actions

• Investment properties or vacation homes

Remember Maria from the beginning of this article? The homestead exemption helped her situation, but only because we acted quickly to invoke it properly. Many families don't realize they need to claim this protection—it doesn't always happen automatically.

Limited Liability Companies (LLCs): Creating a Legal Barrier

If you own rental properties or investment real estate, an LLC is often your most practical first step for asset protection. Think of it as building a firewall between your personal assets and your investment properties.

Here's how it works: when you hold real estate in an LLC, the LLC becomes the legal owner of the property—not you personally. If someone gets injured on the property and sues, or if a business dispute arises, they can only pursue the assets held within that LLC. Your personal savings, your home, and your other investments remain protected.

I had a client, David, who owned three rental properties in Queens. After a tenant filed a lawsuit over a slip-and-fall accident, David was grateful he'd listened when I recommended placing each property in a separate LLC. The lawsuit could only reach the assets of the one LLC that owned that specific property—his other two buildings and his personal assets were completely insulated.

Best Practices for LLC Asset Protection

Creating an LLC isn't enough—you must maintain it properly:

1. Keep finances completely separate: Never commingle personal and business funds. This is the number one mistake I see clients make.

2. Maintain proper records: Document all business decisions and keep accurate accounting records.

3. Operate in the LLC's name: Sign all contracts and conduct all transactions as a representative of the LLC, not in your personal capacity.

4. Consider multiple LLCs: If you own several properties, consider placing each in a separate LLC to compartmentalize risk. Yes, this creates more paperwork, but the additional protection can be invaluable.

5. Carry adequate insurance: An LLC doesn't replace the need for comprehensive liability insurance—they work together as complementary protections.

The attorney fees and annual filing costs for maintaining LLCs are modest compared to the protection they provide. For most real estate investors, this is a no-brainer.

Irrevocable Trusts: Maximum Protection With Serious Trade-Offs

When clients need more robust protection than an LLC provides, I often discuss irrevocable trusts—but I'm always honest about the significant trade-offs involved.

An irrevocable trust offers powerful asset protection because you're legally transferring ownership of your property to the trust. Since you no longer personally own the asset, creditors generally cannot reach it to satisfy your debts. The property is managed by a trustee for the benefit of named beneficiaries (often your children or other family members).

Sounds perfect, right? Here's the catch: "irrevocable" means exactly what it says. Once you transfer property into this type of trust, you generally cannot take it back or change the terms. You've permanently given up control.

When Irrevocable Trusts Make Sense

Despite the permanence, irrevocable trusts can be excellent tools in the right circumstances:

• Estate planning integration: If you're already planning to pass real estate to your children, an irrevocable trust can simultaneously protect the property from creditors and reduce estate taxes.

• Medicaid planning: These trusts play a crucial role in protecting your home from Medicaid estate recovery if you need long-term care—but they must be established at least five years before applying for Medicaid.

• High-risk professions: If you're in a profession with significant liability exposure (such as a business owner or contractor), the protection may be worth the loss of control.

Critical Timing Considerations

Here's something I tell every client considering an irrevocable trust: timing is everything. You must establish and fund the trust well before any creditor issues or lawsuits arise. If a court determines you transferred property to defraud existing or imminent creditors, they can reverse the transfer entirely. This is called a "fraudulent conveyance," and it can completely invalidate your protection strategy.

The general rule of thumb? Plan ahead when times are good. Once you're facing a lawsuit or know a creditor claim is coming, it's too late for this strategy.

New York's Limitations on Asset Protection Trusts

I should mention that New York doesn't recognize "self-settled" domestic asset protection trusts (DAPTs)—where you transfer property to a trust but remain a beneficiary. Some other states, like Nevada, Delaware, and Alaska, do allow these arrangements. While New York residents can potentially create trusts under another state's laws, this adds complexity and cost, and the effectiveness can be uncertain.

At Alatsas Law Firm, we carefully evaluate whether an irrevocable trust makes sense for each family's unique situation, always weighing the protection benefits against the loss of control and flexibility.

Strategic Debt Structuring: Equity Stripping

Here's a strategy that often surprises people: sometimes the best way to protect equity is to reduce it—at least on paper. This approach is called "equity stripping."

The concept is straightforward: if your property has little or no accessible equity, it becomes an unattractive target for creditors. After all, if a creditor forces a sale of your property but the proceeds only cover existing liens and mortgages, they receive nothing.

How Equity Stripping Works

One common method involves taking out a legitimate loan against your property—such as a home equity line of credit (HELOC)—and securing that debt with a lien on the property. The proceeds from the loan can then be placed in a protected asset, like a retirement account, or invested elsewhere.

Another approach involves creating a "friendly lien" where you place a secured loan with a related entity or family member. However, this strategy requires extreme caution and proper legal structuring to ensure it's not deemed fraudulent.

Important Caveats About Equity Stripping

I want to be crystal clear about this: equity stripping only works as a proactive strategy. If you're already facing a lawsuit or have a known creditor, attempting equity stripping can be considered fraudulent and may result in serious legal consequences.

Additionally, equity stripping has real financial costs and risks:

• You're taking on debt, which means interest payments and increased financial obligations

• If property values decline, you could end up "underwater" with debt exceeding your property's value

• The strategy can complicate your credit profile

For these reasons, I typically recommend equity stripping only for specific situations—such as high-risk business owners with substantial real estate equity—and always in consultation with both legal and financial advisors.

Asset Titling Strategies: Tenancy by the Entirety

For married couples, New York law offers a special form of property ownership called "tenancy by the entirety" that provides built-in creditor protection.

When property is held as tenancy by the entirety, creditors of just one spouse generally cannot place a lien on or force the sale of the property. The protection only fails if both spouses are liable for the same debt.

This protection automatically applies to real property owned by married couples in New York unless you specifically choose a different form of ownership. However, it's important to verify that your deed correctly reflects this ownership structure.

I recently reviewed documents for a couple who assumed they had this protection, only to discover their property was titled as "joint tenants" instead. We corrected the title, but it was a reminder that the details matter enormously in asset protection.

Maximizing Your Retirement Account Protection

While not specifically about real estate, it's worth noting that retirement accounts enjoy some of the strongest creditor protections under federal and New York law. Funds in 401(k)s, IRAs, and pension plans are generally shielded from creditors.

If you're considering equity stripping strategies, placing proceeds into maximized retirement contributions can be an excellent way to protect those funds while also benefiting from tax advantages.

Comprehensive Insurance: Your Critical First Defense

Before implementing any complex legal strategies, make sure you have adequate insurance coverage. For investment properties, this means robust landlord liability insurance and a substantial umbrella policy that extends your coverage.

Think of insurance as your first line of defense and legal structures as your backup defense. Insurance handles the vast majority of claims, and legal strategies protect against the catastrophic claims that exceed your coverage or fall outside its scope.

I've seen too many property owners spend thousands on legal entity structures while carrying minimal insurance—that's backward. Get comprehensive coverage first, then add legal protections as appropriate.

The Danger of DIY Asset Protection

Here's what I see all too often: property owners find information online about LLCs or trusts, try to set them up themselves, and inadvertently create structures that fail when actually tested. Or worse, they implement strategies at the wrong time and expose themselves to fraudulent conveyance claims.

Asset protection planning requires careful coordination of legal structures, tax considerations, and timing. A strategy that works brilliantly for one family might be completely inappropriate for another, depending on your assets, risk profile, family situation, and goals.

Taking Action: Your Next Steps

If you own real estate in Brooklyn, Queens, or Staten Island, here's what I recommend:

1. Assess your current risk level: Consider your profession, business activities, property holdings, and existing debt situation.

2. Review your existing protections: Check your property deeds to confirm ownership structure. Review your insurance coverage. Understand what homestead exemption applies to you.

3. Identify gaps: Where are you most vulnerable? What assets are currently unprotected?

4. Consult with an experienced attorney: Asset protection planning should be customized to your specific situation and integrated with your overall estate plan.

5. Act proactively: The best time to implement protection strategies is before you need them. Don't wait until you're facing a lawsuit or known creditor claim.

Finding Peace of Mind

Remember Maria from the beginning of this article? Through a combination of properly claiming her homestead exemption, negotiating with creditors, and implementing a strategic plan for her future, she was able to keep her home. The relief on her face when we finalized the settlement was one of those moments that reminds me why I do this work.

Your real estate represents more than just financial value—it's your family's security, your children's stability, and often the culmination of decades of hard work. Protecting these assets isn't about hiding from legitimate obligations; it's about smart planning that shields your family from catastrophic loss.

The legal landscape for asset protection can seem complex and intimidating, but you don't have to navigate it alone. With nearly 30 years of experience serving middle-income families in Brooklyn and the surrounding areas, I've helped countless clients implement practical, effective strategies to protect their real estate and secure their family's financial future.

Don't wait until you're facing a crisis. The strategies I've outlined here work best when implemented proactively, as part of a comprehensive estate and asset protection plan. Your family's financial security is too important to leave to chance.

If you're concerned about protecting your real estate from potential creditors, I invite you to reach out to Alatsas Law Firm for a consultation. Together, we can evaluate your situation, identify your vulnerabilities, and develop a customized protection strategy that gives you the peace of mind you deserve. Because at the end of the day, that's what this is really about—knowing that the home and property you've worked so hard to build will be there for your family, no matter what challenges life brings.