Use of Mortgages to Hide Equity from Creditors - November 20, 2014

 

The purpose of a mortgage against real estate is to secure payment of loan obligations.

 

Frequently as part of loan workouts following default, mortgages are assigned (as part of a settlement) to a designee of the borrower rather than discharged. This strategy is often designed to avoid the adverse tax consequences which would follow any forgiveness of debt. In such cases, the mortgage against the property remains of record eventhough the assignee (being the borrower’s designee) has no intent to ever enforce it.

 

Eventually, the cloud on legal title imposed by the mortgage would be eliminated by the obsolete mortgage statute, Massachusetts General Law c.260, §33 – which could be as long as 35 years from the date of its recording. However, until then, the mortgage continues as a cloud on record title and obscures equity which might otherwise attract the scrutiny of creditors.

 

A thorough investigation is required where this kind of asset protection strategy is suspected. Courts are receptive to discharging the mortgage where facts are developed demonstrating that the underlying assignment of the mortgage was not treated by the parties as bona fide and for the purpose of securing a continuing obligation.