Archive for November, 2013

Protecting Secured Creditor’s Rights In Bankruptcy

There are several protections under Bankruptcy Code for individuals or groups that have supplied services or goods to a debtor on credit before a debtor’s bankruptcy filing date. When done properly, a trade creditor can increase the chances of receiving a distribution from the bankruptcy estate by invoking these protections. If the trade creditor does not take action, the debt might be defined as an unsecured claim. There are several different ways in which a creditor can be protected during a bankruptcy case.

What is a Request for Administrative Expense?

The first protection is offered under Section 503(b)(9) and it is known as a Request for Administrative Expense. If you have sold goods to a debtor within the 20 day period before the bankruptcy case is filed, you can apply for your claims to be considered an administrative expense priority. This is only eligible for goods and not services.

What is a Reclamation Demand?

You may also consider the potential for a Section 546(c) Reclamation Demand. This section is broader than the first example since it is expanded the goods sold in the 45 day period prior to the filing of the petition. In this scenario, however, the rights of sellers to reclaim goods are often subject to prior interests of secured parties. A reclaiming seller will have to file on time for the reclamation demand but he or she might also need to file an adversary proceeding to prevent the debtor from using the purchased goods or from commingling the goods with other supplies.

What is Post-Petition Assertion of Mechanics’ Lines?

Finally, another option for a secured creditor is the Post-Petition Assertion of Mechanics’ Lines. States have all adopted laws regarding the protection of creditors whose labor, services, equipment or materials were used to improve the land of the debtor.

Even when a secured creditor takes all these steps, it is important that no other action is taking during the bankruptcy case to impair these rights. For example, a debtor might take action to sell property free and clear of liens, and this sale would include mechanic’s liens.

From the perspective of secured creditors, there have been actions taken to protect their interests when a debtor files for bankruptcy. When used properly by an experienced attorney, the provisions listed above can be extremely helpful in moving a case forward and having the interests and rights of the creditor at the forefront of a bankruptcy case. A creditor must take action by speaking with a qualified attorney from the outset.

Make Your Mortgage Tax-Deductible

Of course, for most of us, life is not like that. Occasionally, we have to borrow money. We borrow it to buy our cars and pay for our vacations – and we borrow it to buy our homes. When we do, we pay for it dearly. Even at today’s bargain-basement mortgage rates, a $200,000 home costs more than $400,000 over the 25-year term of a mortgage. Toss in the fact that most middle-income earners are paying half of what they earn to the government in the form of taxes, and our struggling homebuyer is forced to earn in excess of $800,000 in order to pay off his or her $200,000 loan.

But what can you do? That’s the way the world works, so most of us knuckle down, make our payments and dream about the day we actually “own” our home. At the end of the process, we find ourselves house-rich, cash-poor and desperately behind in our retirement savings plans.

Is there another way? Fraser Smith, a retired financial adviser living in Saanichton, B.C., and author of a little book entitled The Smith Manoeuvre, says there is. All you have to do is make your mortgage tax-deductible. This will do two things:

  1. free up capital you can use to pay down your mortgage faster, and
  2. allow you to supercharge your retirement savings program. Here’s how it works.

In Canada, banks will typically lend you 75% of the value of your home. If you own a free and clear home worth $100,000, the bank may lend you $75,000 to invest in something else. If you have a mortgage outstanding, it will be 75% less whatever you owe. For example, if you still owe $75,000 on the mortgage, then you’re at break even. However, if you only owe $74,000, there’s $1,000 sitting in your home you could borrow to invest.

And, according to Smith, that’s precisely what you should be doing. Borrowing it and using it to buy interest-bearing investments for your retirement. But wait a minute, you say, isn’t that just robbing Peter to pay Paul? No, and here’s why.

In Canada, when you borrow money to invest, the interest on the loan is tax-deductible, a bonus that gets you a tax refund cheque if you’re employed or reduces your taxes if you’re self-employed. You then take that refund or excess income and plunk it down on your mortgage.

This has the virtue of increasing the equity in your home, equity you can then capitalize on by borrowing on it and using the money to buy more investments. Once again, the interest is tax-deductible, generating an even bigger refund cheque next year or reducing your taxes even further, allowing you to pay off your mortgage that much faster. And so it goes.

At worst, this plan reduces the time it takes to pay off your mortgage by about 2.5 years, while at the same time getting you started on the road to retirement savings.