Bankruptcy: Know The Rules So You Can Profit

Bankruptcy can be a problematic element of note investing if the investor doesn’t fully understand the process, rules, and regulations of bankruptcy and the implications it may have on their particular investment. Our company recently bought two notes from the same borrower which had filed Chapter 11 Bankruptcy, which is a re-organization of an entity or company (similar to Chapter 13 which is for an individual). The borrower had over 11 properties that they she was surrendering and had declared she wanted to keep her homestead only. In my mind I thought it was the perfect scenario, the borrower was pending an approval of their Ammended plan, and contact with their bankruptcy attorney indicated they were willing to provide a deed in lieu on the properties. We decided based on the evidence from her case, we would buy the notes and have a quick and easy turn around on both notes.

Shortly after our purchases, both the borrower and attorney went AWOL, I mean NO response after multiple attempts! Although the workout is taking MUCH longer than expected, and the dreaded foreclosure had to be implemented, we are still going to make a nice profit on the two deals, and have learned a lot along the way.

We realized that although we were aware of bankruptcy and believed we understand how it effected us that there was a lot we still had to learn. I wanted to write this post to help you understand what to be aware of before buying a note with a borrower in bankruptcy.

Timeline for Bankruptcy
Chapter 7 ( Typically 4 – 6 months)
Chapter 13 or 11 (Average of 3 – 5 years)

Contact with Borrower
When a borrower is in bankruptcy you are legally prohibited from contacting the borrower directly and must speak with their attorney or trustee until a lift of stay has been filed and approved.

Gaining Title
Even if the property has been surrendered (the owner does not want it anymore) or the debt itself is observed, you still need a Deed In Lieu or Foreclose on the property to gain title.

How that effects you…
In order to initiate contact with the borrower and potentially start the process of the “workout” you will need to file a lift of stay. After a lift of stay has been requested it typically takes 30 – 60 days to be given a court date to have the hearing to receive approval. So this could extended the workout timeline on your note.

Automatic Stay
Automatic stays are put into motion after the borrower enters Bankruptcy. It is intended to prevent creditors from further contacting, harassing, or attempting to collecting debts from the borrower. You must apply for this to be “lifted” and be granted approval within the BK court. It is typically granted to creditors that have collateral that is not properly being protected so they can take the next steps to protect their asset such as foreclosure.

How that effects you…
Although applying for a lift of stay is rather easy, being approved for it in court can be more of a challenge. For instance, the court will not lift the stay when an unsecured debt will be included in the debtor’s discharge (so for Chapter 11 or Chapter 13 plans). If you’re early on in the plan or your borrower files for Chapter 11 or 13 right before the final judgement (this actually happens a lot more than you’d like to know), it could take up to a year or longer before their plan is approved and you start to see some form of payment or workout solution. In the mean time you’re stuck waiting with a note you can’t do anything with! 

Proof of Claim and Transfer of Claim
In Chapters 7 and 13 and 11 bankruptcy cases, all unsecured creditors must file a proof of claim for their claim to be allowed.  Certain secured creditors, however, do not have to file proofs of claim to participate in a bankruptcy case. For example, lien holders and other secured creditors do not have to file a proof of claim to preserve their liens in a bankruptcy case. You have 90 days after the first meeting of the creditors to file this claim. 

Transfer of Claim happens when a creditor has changed, for example if the note is purchased from the current lender on file, you need to file a transfer of claim to prove you are the new creditor.

How it effects you….
I suggest checking with an attorney that is familiar with the bankruptcy process in the state the borrower is located within to find out if you a required to file a claim or not. This is especially important if your borrower is in Chapter 11 or 13 and a payment plan will be made to the creditor on file for the specific property. You want to ensure that your note/property will be properly addressed in their plan.

Bankruptcy Plans
A payment plan is created in both the Chapter 11 and Chapter 13 BK cases. This must be approved formally by the court before set into motion and can take up to two years before it is formally approved. It outlines the exact amount secured creditors will receive in the form of payments and for how long.

How it effects you…
Reviewing the plans before buying a note that has a borrower in BK is extremely important. If a payment schedule has been created within this, it will allow you to see what you are expected to be paid per month, for how long, and at what interest rate. If you are buying this note as a “re-performing loan” then this is the sole determining factor of your ROI and must be looked at carefully. There can be amendments to the original plan, so make sure to look for that as well. It’s also important to know if the plan intends for you property to become a part of their repayment plan, or if it is being surrendered. If it’s surrendered then a foreclosure or DIL is necessary before you are able to do anything with the property.

Now there are other elements to be aware of within Bankruptcy and many rules and regulations that were not discussed in detail here. If you want more information, glossary, or tips with BK, I suggest you take a look at the BK “Cheat Sheet” and Due Diligence checklist we provide to our paid members of NoteInvestingClub.com  for more help. Let me know any questions you may have about this post or bankruptcy itself below!

Remember, I am not an attorney. This post does not provide legal advice and the Provider is not a law firm.  None of our customer service representatives are lawyers and they also do not provide legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer if you want legal advice.

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Parlaying your IRA into a Family Fortune

I am in my early 20’s and most of my fellow investor colleagues consider me very young for the real estate game. Knowing that I’m starting earlier than most, I want to be ahead of the game financially and with that comes planning and preparation, especially with IRA’s and taxes.  With that being said I’ve been doing a lot of reading on the power of IRA’s and Tax Protection and just finished reading a wonderful book by Ed Slott, How to Parlay your IRA into a Family Fortune.

The Main Idea of the Book:

You can “Parlay for your IRA into a Family Fortune” by setting up your Roth IRA to be given to a beneficiary (typically someone that is younger than you such as a child or a younger spouse) which allows something called a “stretch”. The beneficiary can continue to make contributions to the IRA growing and building your original retirement based on their  life expectancy according to the IRS, tax free, taking only the minimum distribution the entire time.

Let’s use an example from the book to make this a little more clear.

“Bob” leaves his 39 year old daughter, his beneficiary, a 1.5 million Roth IRA. Because of his daughters current age, the IRS says she has a life-expectancy for 43.6 years remaining to contribute to that IRA before the required withdrawal date. Now Bob was no dummy, he planned for this day properly, ensuring that the structuring of his estate and IRA allowed maximum growth and minimum tax payments (if he did not set this up before his death it would have been left to his estate and a large portion of his IRA would have gone to paying estate taxes). His daughter then inherits this money 100% tax free because of his structuring and now has the ability to continue growing that wealth by self-directing it getting a 8% return (which let’s be honest is a very feasible return this day in age). By the end of her 43.6 year life expectancy she grew the 1.5 million inherited IRA into $11,903,767 all tax free while slightly increasing her annual income taking the required minimum distributions! Talk about the power of growth!

Okay, you’re probably thinking “well I don’t have 1.5 million in an IRA for my kids”,  but the major point Ed Slott is trying to make in this book is the that the power of time, growth, and compounding interest work just as well in an IRA that is stretched with $100,000 or $1,000,0000. It’s tax free growth regardless!

In order to be able to STRETCH your IRA to maximize growth and contribution limits and minimize taxes you need to:

1. Get a ROTH IRA (you can do this by rolling over an existing IRA, 401K, or other traditional investment plan or if time allows, starting one while you are young).

• Check with your IRA custodian to ensure they allow stretch IRA’s and can set up everything needed prior to your death to allow the stretch.

2. Name a Beneficiary to each ROTH IRA you own. This can be 1 person or multiple but discuss with your custodian the proper way to do this.

• There are a number of suggestions he gives in the book on this topic, and it is highly suggested that you keep your IRA beneficiary forms updated as much as possible in the event of death, divorce, or other circumstances. If this form is in existence after death, it supersedes your will and all of your IRA will be given to the beneficiary, hence the reason you want to keep it updated as best as possible.

3. Provide instructions and incentives to your beneficiaries to ensure they maximize this opportunity after you pass.

• You cannot control if your beneficiary takes advantage of the wealth building opportunity you provided to them or not, but you can however provide them incentives and the tools to utilize and maximize the stretch. Leaving them explicit instructions on what steps to take to properly stretch the IRA with a chart showing the possible growth vs. taking the money and paying 30% or more in taxes upfront.

Now I am not expert in this area, nor am I an accountant, lawyer, estate planner, or IRA advisor, so I highly suggest if you are interested in what you read here that you pick up your own copy of the book and explore the many details, laws, and regulations that were not discussed in detail. The book is extremely well written and easy to understand. It makes learning about growing your wealth enjoyable and exciting! I hope this blog helps you take the right step toward parlaying your IRA into a family fortune!

Florida’s New Foreclosure Laws: House Bill 87

Florida is known for being one of the worst foreclosure states in the nation.  Florida is a judicial state, meaning foreclosures are required to pass through state courts before title is transferred to the lender and then sold in auction. In recent years this process could take anywhere from 480 days to 860 days! This lengthily timeline was largely due to the increase in defaulted mortgages around the market crash in 2007/2008. The court system and many lending institutions were unable to handle the increase in defaulted mortgages and in result prolonged the process of foreclosure.

House Bill 87 was passed by Governor Rick Scott earlier this year and began taking effect June 7th, 2013. There were a number of changes that could benefit and harm both the borrower as well as the lender. The most prominent change in Bill 87 is the expedited foreclosure process for any lien holder in default in uncontested cases or against homeowners who have an illegitimate defense. Coming from an investment/lender stand point, this is a tremendous victory. ALL lenders (including HOA’s) are now able to file a foreclosure complaint (Lis Pendins) and if uncontested within 45 days or failure to produce genuine defense allows the lender to enter a final judgement of foreclosure and request an order of foreclosure sale. In addition, HB87 made all foreclosure judgements final.

One major change that has negatively effected the lenders position is the requirement to produce the note or certification of ownership of the note when a deficiency judgement is filed. The lack there of can invalidate the deficiency judgement and can inevitably forces the lender to “dismiss” the borrower from the judgement “without prejudice” and begin the process over again at a later date. If the original note is lost, an affidavit with clear chain of title needs to be produced in order to initiate foreclosure.

The last major stipulation in House Bill 87 is a lessening in time allowance for deficiency judgements to be ordered. A deficiency judgement is the lenders ability to collect the difference in unpaid balance to the foreclosure sale price. Previously, the lender was able to collect for up to 5 years the difference in unpaid debt to sale price, but is now reduced to 1 year allowance to seek a deficiency judgment on residential properties with no more then 4 dwelling units. (If you’re interested in learning about 4 dwelling units or larger, please click here).

In our business, dealing with foreclosures is always a possibility. It is important not only for us to understand how these provisions affect our business but also for our partnering investors. It is important to us that we are able to give accurate estimations in timelines, and understanding the laws allows us to do this. Florida is finally able to liquidate some of those “empty house” assets, and Seasoned Funding is here to help!

The Power of 72: Prepare for Retirement by Making Money Work for You

I first heard of the rule of 72 at my local County Chapter REIA monthly meeting. We had a guest speaker from a local Self Directed IRA Company, NuView IRA. I was excited to hear his presentation because I love hearing new ways to shelter and grow my wealth using alternative methods such as solo 401Ks and Self Directed IRA’s. During his speech he showed us a very odd-looking chart that had the numbers 1 – 65 on them. There were 7 consecutive squares of the chart blocked out in white instead of the bold blue color of the remaining 58 blocks. He began to explain what we were looking at and the “Rule of 72“, a simplified method that helps you determine the amount of time that would be needed to double your investment  (72/interest rate = time to double).

“The most powerful force in the universe is compound interest” – Albert Einstein 

The 7 white blocks on the chart he showed us was demonstrating the doubling period or 7 years time it would take to double your money if you were receiving a 10% interest rate, which let’s be real – the average person is nowhere near receiving. The point of the chart was to emphasize how important time is when investing money.  With that being said, your age can greatly affect your ability to double your money or not.  The chart below should give you a better idea of that timeline.

So let’s give an example. If you are 25 and you are receiving a 5% interest rate on the $100,000 you have in your IRA (which is a higher than average rate of return, even for investing in stocks/mutual funds). That means it would take you 14.4 years to double your money and you would have $200,000 in the IRA by the time you are 39. If you did nothing additional to the money and continued to receive that 5% interest rate, by the time you were at retirement age (65) you would have around $775,000 in your IRA. That’s not a bad amount of savings if you have a good pension plan with benefits from your previous employer. If you have no additional pension plan; with the average life expectancy rate rising, you will be living on a $51,000 year salary that will disappear at the age of 80 (15 years from retirement).

Can you imagine what your rate of return would be if you started with $100,000 at 5% interest at the age of 45, or 55…You’re ability to double your money is greatly diminished in return affecting your ability to retire at the age you desire.

So what’s the solution?

To be honest, there is none; but there are ways that you can grow your wealth at a much faster rate than the annual contribution limit (which is $5,500 for anyone under the age of 55) or from putting your money into a savings account (current national average 0.21%), CD (5 year CD average 1.34%), or  Mutual Fund/Stocks (current average yield 3.4%).

A Self-Directed IRA (SDIRA) is similar to a traditional IRA with the exception that you as the individual owner are allowed to choose and direct what investments you would like to pursue with your IRA such as real estate, gold, promissory notes, and even limited liability companies (LLC) or partnerships while receiving the traditional tax benefits such as tax deferment and even tax-free growth within your IRA.

When used properly, SDIRA’s can be an incredible vehicle for building wealth inside your retirement plan although there are regulations when using a Self-Directed IRA that should be closely followed and understood prior to making any investment decisions (you can see some of those rules and regulations by clicking here).

Our company, Seasoned Funding, LLC  is a privately funded real estate investment company that works with private individuals who often have money sitting idle in IRA accounts, 401Ks, or even saving accounts. After becoming an approved  investor, we assist the individuals in the process of rolling over their current IRA or 401K into a Self-Directed IRA. We then form a LLC or partnership with their SDIRA and invest in various forms of real estate such as residential and commercial properties and/or promissory notes.  We give the individuals the opportunity to build their wealth at a much faster rate by giving a higher than average rate of return on investment and it’s all done legally, passively, and tax deferred or tax-free. The IRA owner can make their annual contribution while putting their existing IRA money to work with a higher annual rate of return. The chart below is a great demonstration of how we work with SDIRA’s (click on it to make it larger);

There are endless ways to build your wealth using solo 401K plans or Self-Directed IRA’s. There is no need to fear retirement when you can learn alternative methods for investing and can take control of your future. Check out our website to see how we are getting higher than average rate of returns for our partners.

*This is not an offer to purchase or sell securities. This overview is for informational purposes only and is not an offer to sell or solicitation of an offer to buy any securities, and may not be relied upon in connection with the purchase or sale of any security. Interest in the fund, if offered, will only be available to parties who are “accredited investors” (as defined in the Rule 501 promulgated pursuant to the Securities Act of 1933, as amended). Any offering will be made only to qualified prospective investors pursuant to a confidential offering memorandum and subscription agreement, all of which should be read in their entirety prior to investment.