Can I arrange loans against my properties by borrowing from relatives?

A debtor's family members – parents, siblings and other relatives − can encumber the debtor's property. Related parties are legally distinct parties. Liens or security interests between connected parties is enforceable provided there was adequate consideration for the loan. Of course, loans from family or affiliated parties will more likely be scrutinized by creditors as fraudulent transfers. 'Insider' loans are suspect – and should be. If a court finds that a loan is a sham and without fair consideration (an equivalent exchange of money, property or services), the mortgage will be nullified by the court. But even a spouse may encumber separately-owned property in 'common law' property states. Community property states allow only property that is owned and titled separately to be security for the other spouse.

One spouse can encumber assets of the other, but fraudulent transfer laws make these loans challengeable, particularly when the mortgage arose after the claim. An affiliated business that liens your property is also less easily defended if you own or control that business. Nevertheless, people do form corporations, limited partnerships and limited liability companies to hold a mortgage against their real estate. The mortgage may later be overturned by a court; still an asset search may not reveal the relationship between you and the lending entity. The lien thus provides protection to the extent it deters the less inquisitive plaintiff's lawyer seeking unencumbered assets. But it's faulty planning to rely on 'sham' mortgages that won't withstand judicial challenge.