Thursday, 4 February 2016

Why Bankruptcy Might Not Be The Best Option

Why broke people shouldn’t always choose bankruptcy

*Originally published on Advisor.ca* 
By Ted Michalos February 1, 2016

bankrupt-drowning-financially
 There’s more than one way to deal with being broke. While instinct might suggest simply filing for bankruptcy, it’s also worth considering a consumer proposal – a legal agreement allowing a debtor to repay an agreed upon portion of his or her debts to creditors.

Choosing the best method to resolve debts comes down to how each will impact someone’s income, assets and monthly payments.
People used to favour bankruptcy. Prior to 2008, there were as many as six personal bankruptcy filings for every consumer proposal. In 2009, the year personal insolvency filings in Canada peaked, there were three personal bankruptcy filings for every consumer proposal.

In September 2009 the federal government enacted changes in the Bankruptcy and Insolvency Act that made personal bankruptcies longer and more expensive. This, in turn, made it easier for people to file a consumer proposal instead. Today it’s a fairly even split nationally, while in Ontario there are now more consumer proposals than bankruptcies.

There are times when filing for bankruptcy is the correct way to deal with financial problems; and sometimes filing a consumer proposal makes more sense. A bankruptcy trustee has a duty to present all options to debtors and help them make decisions based on the assets they own, the income they earn and what they can afford.

Deal with the financial impact of tragediesWhat is a consumer proposal?
In a consumer proposal, a person offers to settle unsecured debts for a portion of what he owes. There are no new interest charges on debts included in a proposal. In most instances, the total repayment ends up being around one-third of a person’s unsecured debt. With the average insolvent debtor owing around $60,000 in unsecured debts, that means he would typically pay $20,000 under a consumer proposal.

From the creditor’s perspective

So why would creditors accept one-third of what they’re owed? Simply because there’s a chance of getting even less money back from someone who is bankrupt. A consumer proposal is an alternative to filing for bankruptcy, and the debtor is likely to declare bankruptcy if he can’t make a deal with creditors. As long as the debtor offers terms that require him to repay more than creditors would get in a bankruptcy, it makes sense to accept the consumer proposal.
Creditors accept a proposal by voting on it. Each dollar of unsecured debt represents a vote, and creditors representing a simple majority of unsecured dollars need to agree to the terms. Technically, when a consumer proposal is filed, the law assumes it will be accepted. It’s only if creditors with 25% of the total debt ask for a meeting of creditors that a vote even takes place.

From the debtor’s perspective

Consumer proposals have the same legal protections as bankruptcy. Debtors automatically receive a Stay of Proceedings, which halts any lawsuits, wage garnishments or similar actions. It also prohibits any new actions. To remove the Stay, a plaintiff needs to bring a motion before the Bankruptcy Court and argue the legal action should be permitted. These motions are fairly uncommon and usually only occur when there are allegations of misdoings on the part of the defendant, or when the plaintiff requires the Court to determine the amount of the claim.
When the debtor fulfills the obligations set out in the proposal, he receives a Certificate of Full Performance, which, like a bankruptcy discharge, eliminates the debts spelled out in the proposal.

Why choose a proposal?

When a person files personal bankruptcy, he is saying, “I cannot afford to repay any portion of my debt. I need to avail myself of the relief provided under the law to have my debts cleared.” However, there is a cost to having the debts erased.
A bankrupt person exchanges the things he owns for the unsecured debts that he owes. While he doesn’t lose everything, (every province has an Executions Act exempting things such as furnishings, personal possessions and, in some provinces, cars), he may lose his home equity, investments, and other property.
While RRSPs and pensions are largely protected in bankruptcy, other non-registered investments, and RESPs, are not. In addition, bankruptcy law bases a person’s payments on his household income and size. The more a bankrupt person earns, the higher his bankruptcy payments will be.
When someone files a consumer proposal, the payment terms are agreed to up front. This benefits the debtor in several ways. No assets are seized and sold, and there are no penalties if his income increases during the proposal. A proposal will always cost an insolvent debtor more than filing for bankruptcy, but the payments are fixed and may be spread over a five-year term. This often means they’re more manageable than the payments required in a bankruptcy.
There are, of course, debtors for whom a bankruptcy might negatively impact their employment. For example, people who must be bonded or handle trust money are not bondable if they file for bankruptcy. By filing a consumer proposal, a debtor can honestly say, “I have never filed for bankruptcy” on any form or application.

Ted Michalos, B.A., CPA, is a Licensed Insolvency Trustee and co-founder of Hoyes, Michalos & Associates Inc. in Ontario, Canada.

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Tuesday, 26 January 2016

Did You Buy a Home in 2015? Want to Save Money this Tax Season???

Hey everybody! This is one of those opportunities that I love in my job where I get to be the bearer of excellent news, and I love that!

For those of you who bought a home for the first time in 2015(or even for some of you who weren't first-timers), there could be some big tax savings coming your way when you file your 2015 tax return. Make sure to discuss all the options with your tax professional or accountant, but the basics are as follows:

-Eligible first time home buyers who purchased a home in 2015 can claim an amount of $5,000 on your 2015 tax return. This in turn could lower your taxes due or result in a larger refund. Either way, it's a win-win if you qualify so make sure to ask about it when filing this year.

-Eligible persons who purchased a home in 2015 and qualify for the disability tax credit, or those purchasing a home for the benefit of family who is eligible for the disability tax credit may also qualify to claim the same $5,000 amount. You do not have to be a first time home buyer to qualify for this amount under this disability credit program.

If you're interested in the details, check out the official CRA page here:

http://www.cra-arc.gc.ca/nwsrm/txtps/2016/tt160120-eng.html

For those who haven't bought yet, or are thinking about purchasing in 2016, make sure you look into the RRSP Home Buyers Program, which allows eligible first time home buyers the opportunity to access their RRSP savings without paying tax on the amounts withdrawn. Details on this program can also be found at the link above.

If you are able to plan your purchase to combine these two great government programs, you could stand to save yourself a whole bunch of money while getting your first foothold on the property ladder!

***This article is intended for informational purposes only. Please refer to your tax professional or the official CRA guidelines to determine eligibility or for the most up-to-date information. CRA guidelines are subject to change at any time.***

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Friday, 15 January 2016

Caulking: When, Where, and Why

Mike Holmes: OK, holiday relaxation is over and it's time to pull out the caulking gun

Caulking is a project most homeowners will do themselves at some point, so it's no surprise I often get questions like "Do I caulk my toilet? What about the sink? Do I caulk around the kitchen cabinets?" Since the number of indoor jobs rise as outdoor temperatures drop, let's talk about what should and shouldn't be…

Monday, 11 January 2016

2015 - Recap

Hey everyone, Happy 2016! I've been taking some time the last week to recap and review how my 2015 went, and to sum it up it was excellent!

Last year saw the culmination of years spent dreaming, reading, researching, and learning turn into a realized goal: become a successful mortgage broker. Changing gears and pointing my career in a new direction has been terrifying at times, but ultimately rewarding in so many ways.

I have my clients to thank for the joy that you give me in doing my job. As with most things in my life, I give 110% when I am here and you support me with your smiles when the job is done and everything goes according to plan. Even when our best-laid plans are derailed I know I can count on that sense of achievement that comes from seeing a file through to completion, whether that be a new home, a refinance of your current home, or an expansion of your real estate investments. These are all substantial parts of your lives and I'm grateful to be a part of them with you!

In my personal life, 2015 brought plenty of great things as well. A great year with my fiance, a new home, and lots of good times spent with family and friends! A ton of hard work and effort behind the scenes went in to making the good happen, and I can't thank my future wife and my friends and family enough for supporting me when it came time to put in work.

2016 will bring many more adventures and I'm eagerly awaiting them all: Our wedding in September(with tropical honeymoon to follow!), and the massive renovation going on in our new home. In amongst all this I look forward to more enjoyable times with family and friends, and specifically to spending more time with my brother who has come back to Kamloops to pursue a new chapter in his own life.

Thanks 2015, you were good to me!
Here's to an even better 2016!

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Tuesday, 29 December 2015

Mobile & Modular Homes

Mobile and modular homes make up a large and steadily growing part of the housing market in Canada. In fact, these pre-fabricated homes made up more than 15% of the new housing created in 2014. That's too large a segment of the market to ignore!

With that in mind, I wanted to give some insight into the benefits and challenges of considering this type of real estate for your next home or investment property. Dollar for dollar, homes which are manufactured off-site may offer greater value for your investment. They can be custom-built to your specifications if desired, and then moved into place and installed at a site of your choosing. If you opt for a mobile home, you may even have the option of moving that home elsewhere later on if you desire. It is for this very reason that these types of properties can be more of a challenge to finance and there are some special considerations.

Due to the risk associated with these types of homes being anything less than permanent(remember, lenders hate risks!), you may expect some challenges when trying to obtain a mortgage. There are consistently fewer lenders who will accept these properties, and some who may charge a premium rate depending on the details. Pre-approvals can pose a challenge as well due to uncontrollables such as pad rent and/or strata fees varying widely from one property to the next. As you can imagine, a mobile or modular on it's own land will be treated differently from one in a park or strata-type community. It's important to have a Mortgage Broker you know and trust to help you navigate this decision.

Some important questions to as are:
  • Does this purchase include freehold land(define Freehold HERE), or is the land leased?
  • What type of foundation is the home on? Is it a concrete pad? Concrete crawlspace/basement? Wooden piers? Steel pilings? 
  • How is the home secured to this particular foundation?
  • Finally, is it truly a "Mobile" or a "Modular" home?(Read on to answer this question...)

Mobile vs. Modular

A mobile home is NOT the same as a modular home, and vice versa. The two types of homes can be best defined by looking at the differences rather than the similarities. Some of the differences are:

Mobile Homes generally:
  • Have a steel frame
  • Use 2x8 floor joists
  • Are built to CSA Standard Z-240(not building code)
  • Can be moved at a later date, after having been originally installed


Modular Homes:
  • Have a wooden frame
  • Use engineered floor trusses
  • Are built to CSA Standard A-277(Canadian national building code)
  • Are also held to BC Building code standards
  • Can NOT usually be moved after having been placed on-site
As you would imagine, lenders find modular homes to be the more preferred option of the two, but this is at the expense of higher initial cost and the inability to move the building later. Modular homes act, look, smell, and think more like a conventional home and if there's one thing mortgage lenders enjoy, it's convention!

While choosing to opt for a mobile or modular home may limit your choice of lenders, a well-trained Mortgage Broker can help you to find a lender who will suit your needs. It is in situations like these that the power of a good Mortgage Broker's lending network can really shine and help you find the best option for your dream property, no matter the construction type. There may be local Credit Unions and specialty lenders who will offer options to suit, or there could be opportunities to shop the big lenders if the property fits their criteria. When you're ready to discuss the options available, give me a call or visit my website to get a secure online mortgage application started!

And most importantly, as always, Ask Questions! Take the time to interview your chosen professionals when making the decision to purchase or refinance your home, it may very well be the single biggest investment of your lifetime. Are they educated in the niche you're interested in? Are they up-to-date? Are they professional, courteous, and ethical?

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Wednesday, 2 December 2015

RBC Posts Record Profits...

Congratulations(I think...) to one of Canada's largest financial institutions(I won't name names here...) on achieving "Record Profits" in 2015!

Considering this has been a particularly uncertain year economically, they've somehow managed to buck the trend and keep right on growing. It's no surprise given their aggressive marketing tactics and their STEEP incentives(Read: IRD calculation HERE) to retain loyal customers. In their defense, they also have an extremely diverse portfolio of businesses and assets to manage, which allows them to minimize their exposure and risk to the more volatile markets in Canada.

Now I'm not going to dumb this dialogue down to "We are getting ripped off by the banks" as @UncommonSenses so eloquently put it in the CBC News comments section, but is it not worth considering that if your bank is posting record profits then are they really your best deal?

As one of the major players in consumer finances and mortgages, this bank plays a role in setting the standards and should act as healthy competition to the other banks, credit unions, and lenders. This role is particularly crucial given their massive marketing power, and their influence over their existing clients. I keep track of their mortgage offers quite closely and while on the surface they may seem to provide competitive rates, there is always a dark side(Star Wars pun intended, 18 days to go!).

A great discussion of the drawbacks of a mortgage with the larger institutions can be found in This Article. What you need to know is that although the rates might be competitive, the terms and penalties are most likely not. And with a large number of homeowners considering moving or refinancing within their original mortgage term, the reality is that you need to consider the penalties. This could mean the difference of thousands or even tens of thousands of dollars later.

When you're ready to discuss whether or not your bank is a good fit for your mortgage, take Yoda's advice and give me a call. Let's start the discussion. Or visit my website today to fill out a secure online mortgage application to get started right now. There are plenty of alternatives to consider that will save you money!

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Tuesday, 1 December 2015

Fixed or Variable, How Do I Know What's Right For Me?

Choosing which type of mortgage rate suits you best is a difficult decision that should require some deliberation. My first suggestion would be to sit down with me and we can go over the pros and cons of each, unique to your situation.

Barring that, here's some helpful advice which may help you narrow the choice down somewhat.

Robert Mclister is found of Intellimortgage Inc., and chief editor of Canadian Mortgage Trends. He has prepared an excellent set of questions to make the decision easier when making this tough choice.

  1. Can you manage a potential rate hike? According to a recent survey, 16 per cent of respondents said they would not be able to afford a 3-percentage point increase in interest rates, while roughly 27 per cent would need to review their budget. Another 26 per cent said they would be concerned, but could probably handle it. “We look at a client’s payment today, factor in amortization and make sure they can handle the potential increase, both during the term and at renewal,” he said. “If a client is set on a floating rate we also find ones with fixed payments, but a fixed payment doesn’t mean ‘risk-free’.”
  2. Do you have three months of savings put aside? Cash reserves enhance one’s ability to withstand higher rates. “The last thing you want is a soaring variable-rate at the same time as other budgetary stress, like a layoff, separation, illness, new baby or some other unforeseen expense.”
  3. Where will you be in five years? Clients who break a fixed-rate mortgage early, can face a steep interest-rate differential penalty. By contrast, terminating a regular variable-rate mortgage costs you just three months of interest. That’s a key consideration if you want refinance flexibility, may sell and rent or can’t port for some reason. In many cases, it’s more prudent to choose a three-year term.
  4. What’s the spread between a 5-year fixed and variable? The current spread is about half a percentage point, far below the long-term average. “That makes the relative cost of a fixed-rate certainty historically cheap,” McLister said. “But it also suggests that the market is expecting low rates to persist. Over the long run, variable rates have easily outperformed fixed rates, but one notable exception is when the spread is very small.” What’s the break-even point? There’s a point when a long-term fixed rate becomes cheaper than a variable rate. “Today, that would happen if prime rate shot up over three-quarters of percentage point,” McLister estimates. “If inflation becomes a threat, the Bank of Canada could easily take rates higher than that. That’s the risk.”  
For more, check out this article from Genworth Canada.

As you can see, there are plenty of arguments to be made for both options. What it really comes down to is your personal preference and your tolerance for risk. The defining question becomes this:

Are you able to sleep soundly at night, knowing the potential for rates to change if you choose a variable rate mortgage?

When you're ready to delve into these questions in more detail, visit me at my website, or fill out a secure online mortgage application HERE any time!

  • Can you manage a potential rate hike? According to a recent survey, 16 per cent of respondents said they would not be able to afford a 3-percentage point increase in interest rates, while roughly 27 per cent would need to review their budget. Another 26 per cent said they would be concerned, but could probably handle it. “We look at a client’s payment today, factor in amortization and make sure they can handle the potential increase, both during the term and at renewal,” he said. “If a client is set on a floating rate we also find ones with fixed payments, but a fixed payment doesn’t mean ‘risk-free’.”
  • Do you have three months of savings put aside? Cash reserves enhance one’s ability to withstand higher rates. “The last thing you want is a soaring variable-rate at the same time as other budgetary stress, like a layoff, separation, illness, new baby or some other unforeseen expense.”
  • Where will you be in five years? Clients who break a fixed-rate mortgage early, can face a steep interest-rate differential penalty. By contrast, terminating a regular variable-rate mortgage costs you just three months of interest. That’s a key consideration if you want refinance flexibility, may sell and rent or can’t port for some reason. In many cases, it’s more prudent to choose a three-year term.
  • What’s the spread between a 5-year fixed and variable? The current spread is about half a percentage point, far below the long-term average. “That makes the relative cost of a fixed-rate certainty historically cheap,” McLister said. “But it also suggests that the market is expecting low rates to persist. Over the long run, variable rates have easily outperformed fixed rates, but one notable exception is when the spread is very small.” What’s the break-even point? There’s a point when a long-term fixed rate becomes cheaper than a variable rate. “Today, that would happen if prime rate shot up over three-quarters of percentage point,” McLister estimates. “If inflation becomes a threat, the Bank of Canada could easily take rates higher than that. That’s the risk.”
  • - See more at: http://resourcecentre.genworth.ca/professional-perspective/fixed-vs-variable-the-age-old-question?utm_source=ho-newsletter&utm_medium=email&utm_campaign=issue5#sthash.S14nPAZs.d
  • Can you manage a potential rate hike? According to a recent survey, 16 per cent of respondents said they would not be able to afford a 3-percentage point increase in interest rates, while roughly 27 per cent would need to review their budget. Another 26 per cent said they would be concerned, but could probably handle it. “We look at a client’s payment today, factor in amortization and make sure they can handle the potential increase, both during the term and at renewal,” he said. “If a client is set on a floating rate we also find ones with fixed payments, but a fixed payment doesn’t mean ‘risk-free’.”
  • Do you have three months of savings put aside? Cash reserves enhance one’s ability to withstand higher rates. “The last thing you want is a soaring variable-rate at the same time as other budgetary stress, like a layoff, separation, illness, new baby or some other unforeseen expense.”
  • Where will you be in five years? Clients who break a fixed-rate mortgage early, can face a steep interest-rate differential penalty. By contrast, terminating a regular variable-rate mortgage costs you just three months of interest. That’s a key consideration if you want refinance flexibility, may sell and rent or can’t port for some reason. In many cases, it’s more prudent to choose a three-year term.
  • What’s the spread between a 5-year fixed and variable? The current spread is about half a percentage point, far below the long-term average. “That makes the relative cost of a fixed-rate certainty historically cheap,” McLister said. “But it also suggests that the market is expecting low rates to persist. Over the long run, variable rates have easily outperformed fixed rates, but one notable exception is when the spread is very small.” What’s the break-even point? There’s a point when a long-term fixed rate becomes cheaper than a variable rate. “Today, that would happen if prime rate shot up over three-quarters of percentage point,” McLister estimates. “If inflation becomes a threat, the Bank of Canada could easily take rates higher than that. That’s the risk.”
  • - See more at: http://resourcecentre.genworth.ca/professional-perspective/fixed-vs-variable-the-age-old-question?utm_source=ho-newsletter&utm_medium=email&utm_campaign=issue5#sthash.S14nPAZs.dpuf
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