Purchase Money Security Interest

Lesson: Purchase Money Security Interest

In this lesson, Nick Palazzolo delves into the specifics of Purchase Money Security Interests (PMSIs), illustrating how they are formed when creditors finance a debtor's acquisition of collateral. He clearly outlines the two main scenarios that give rise to a PMSI: the creditor either sells the collateral on credit or advances funds for the debtor to purchase the collateral from a third party. With engaging examples, such as the purchase of a car or business equipment, he makes the concepts relatable and easy to grasp. Furthermore, Nick breaks down the crucial steps involved in perfecting a PMSI, from filing a UCC1 financing statement to meeting the timely paperwork submissions, thereby ensuring the creditor retains priority over other claims. He emphasizes the need for strict adherence to the perfection process, as overlooking these details could jeopardize the creditor's security interest. The lesson offers valuable insights for understanding the conditions under which PMSIs are created, their importance, and the meticulous procedures required to maintain their legal standing.

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Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Creating a PMSI. Now we talked about this a little bit before, we'll talk about it much more. A PMSI arises when a creditor provides financing for a debtor to acquire the collateral, which is then used as security for the loan. There's two ways in which this will be created. First off, the creditor sells the collateral on credit, retaining a security interest. In this situation, the creditor provides the debtor with the collateral on credit terms. The debtor then takes possession of the collateral and agrees to repay the loan over time. And then the creditor retains a security interest in the collateral until the debtor fully repays the loan. An example here would be a car dealer sells a car to a buyer on credit. The buyer takes possession of the car and agrees to make monthly payments for the next five years. The car dealer retains a security interest in the car as a PMSI until the buyer has made all the required payments. That's a pretty straightforward first one. Next up, the creditor advances funds used by the debtor to purchase the collateral. In this case, the creditor provides the debtor with the funds to purchase the collateral from a third party. The debtor then uses the borrowed funds to acquire the collateral, and the debtor takes a security interest in the collateral as a PMSI. Example here, a bank provides a loan to a small business owner to purchase new equipment for their business. The business owner uses the loan proceeds to buy the equipment from a supplier. The bank then takes security interest in the equipment as a PMSI until the business owner fully repays the loan. Now, the key question to determine if a PMSI exists is whether the debtor purchased the

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