Many homeowners struggling with their debts worry what will happen to their house if they claim bankruptcy. The good news is that filing a bankruptcy does not mean that you will automatically lose your home. Let’s review some of the key facts about bankruptcy and home ownership.
Home Equity is an Exempt Asset
Every province in Canada gives people a set of exemption allowances. What this means is that there are laws that protect certain assets (including household furniture, RRSPs and more) in the event you file bankruptcy.
The idea behind exemptions is that each individual is entitled to retain a certain base level of assets in all circumstances, regardless of financial hardship and/or a bankruptcy filing.
If your home is in the Greater Vancouver or Victoria area each person is automatically allowed to keep home equity up to a value of $12,000 (and up to a value of $9,000 elsewhere in the province).
If You Declare Bankruptcy What Happens to Your Home Equity Over the Exemption Allowance?
If the equity in your home is more than the provincial exemption allowance this doesn’t mean you’ll automatically lose your home if you declare bankruptcy.
When the homeowner wants to keep their home, the equity value over and above the protected amount could be dealt with in a few ways, such as:
- Buying-out the equity as part of the bankruptcy (this is sometimes referred to as “repurchasing” home equity, although the homeowner doesn’t actually move out/lose the home);
- Filing a Consumer Proposal instead of a bankruptcy.
If a homeowner doesn’t want to keep their home, they may decide to sell the property through the bankruptcy – the homeowner would still be entitled to receive their exempt equity amount (up to $12,000) from the sale proceeds.
Will my Mortgage be Impacted by Declaring Bankruptcy?
If your mortgage payments are up-to-date and you want to continue with the mortgage in place, your mortgage will not typically be impacted by declaring bankruptcy. In most bankruptcies there are two “types” of debts – unsecured debts (like a credit card or payday loan) and secured debts (like a vehicle loan or mortgage). Whether a debt is unsecured or secured can change how it is dealt with under a bankruptcy:
Unsecured Debts: These types of debts do not hold any assets as collateral, so the creditor does not have any additional ‘power’. Unsecured debts are written-off through a bankruptcy.
Secured Debts: Creditors (like a mortgage lender) who have a secured debt (like a mortgage) hold an asset as collateral, meaning they have a registered lien or charge on property. In this situation, you have a few choices. You could choose to carry on with the credit arrangements in place (ie. your mortgage); try to negotiate new terms; or choose to walk away from the asset altogether and let the secured creditor have the asset.
Can I Make a Consumer Proposal if I Have a Mortgage?
Even if you have a mortgage you can be eligible to make a Consumer Proposal. A Consumer Proposal can be used to consolidate debt, cut debt balances and keep assets intact, while avoiding bankruptcy. If you can make some payment towards your debt each month, you may be able to make a legal debt settlement with your creditors using a Consumer Proposal filed by a Licensed Insolvency Trustee.
A Consumer Proposal allows people to retain assets (such as a home), and in addition to consolidating all your debts:
- Interest automatically stops;
- Debts can often be reduced by up to 30-80% of the balance due;
- Consolidate government debt and consumer debt.
Consumer Proposals normally do not include (or affect) an existing mortgage.
Can I Renew my Mortgage During Bankruptcy?
If your current mortgage is in good standing, generally lenders will honour mortgage renewals that come due during the period of your bankruptcy.
What About Foreclosures?
Sometimes the start of a bankruptcy is a good time to evaluate whether you want to continue with an existing mortgage that is falling behind. If you decide that you don’t want to keep the home and decide to let the bank move forward with foreclosure proceedings, any shortfall from the subsequent seizure and sale of your home would be written-off as part of the bankruptcy.
Learn more about how these and other legal debt options work when you have a mortgage. Book your confidential free debt consultation with Sands & Associates today!