Your home is probably one of the most valuable investments you’ll make in your lifetime. It’s also commonly thought that declaring bankruptcy automatically means losing your home. But filing for bankruptcy doesn’t necessarily mean you’ll lose your home, depending on the situation.
That said, whether you can keep your home depends on several factors. Let’s go into more detail about how your home is treated during bankruptcy.
Key Points
- Your home may be seized if you file for bankruptcy, but this is not always necessarily the case.
- If you have very little equity in your home, you may be able to retain your home when filing for bankruptcy.
- If possible, you may want to try filing a consumer proposal instead before resorting to bankruptcy, especially if you have a lot of equity built up in your home.
Will I Lose My House If I File For Bankruptcy In Canada?
It’s common to assume that you will automatically lose your home when you file for bankruptcy in Canada. While that may be true in many circumstances, it’s not always the case.
It may be possible to keep your home when you declare bankruptcy, depending on a few key factors, including:
- The equity in your home
- Your outstanding debt
- Your household income
When Can You Keep Your Home During Bankruptcy?
The amount of equity in your home will play a key role in your ability to keep your home during bankruptcy. Certain provinces exempt a part or all of a home’s value in bankruptcy. If you still have a mortgage on your home, only the equity is at risk of being seized.
In Ontario, for example, you may be able to keep your home if your home equity does not exceed $10,000 and you continue to keep up with your mortgage payments. Other provinces have similar exemptions that let you retain a certain amount of equity in your home, which your trustee will help you navigate.
| How To Calculate Your Home Equity Amount? Your equity is calculated by subtracting your current mortgage balance from your home’s market value. For instance, if your home is valued at $800,000 and you have $450,000 left on your mortgage, your home equity would be $350,000 ($800,000 – $450,000). This is a simplified explanation, as there are several other costs involved, such as closing costs. Be sure to include all such costs in your calculations to arrive at a more accurate figure. |
Will I Lose My House If I Have Little Equity In My House?
If you don’t have much equity, you may not lose your home when you declare bankruptcy. This is because there’s essentially nothing for your creditors to recoup even if you were to sell your home. This may be more common in a down market, or if you just bought your home and there’s mortgage default insurance added to the loan.
For example, if you have a home worth $300,000 and you owe $280,000, you’d have a mere $20,000 in equity. If you were to sell your home, there would be little left over once the property taxes, real estate commissions, and other closing costs are paid. That means there would be little proceeds left over for your creditors.
In this case, you probably wouldn’t lose your home, as long as you continue to make your mortgage payments. Even if you go bankrupt, you may still be able to live in your home and build equity with each mortgage payment you make.
Will I Lose My House If I Have A Lot Of Equity?
If you have a sizable amount of equity in the property, you are more at risk of losing your home. However, there is still a way to keep it if you have some cash available.
For instance, if your Licensed Insolvency Trustee (LIT) estimates that a few thousand dollars would be left over after the home is sold and all commissions and fees are paid, you can retain your home if you pay out this money. But if you can’t come up with the funds to buy out the equity, you may lose your home when you file for bankruptcy.
What Happens If You Can’t Buy Out The Equity In Your Home?
If you have equity in your home but can’t afford to buy it out, there are only a few options available:
File A Consumer Proposal
Consider filing a consumer proposal if you don’t have the money to cover your home’s equity. A consumer proposal involves coming up with an agreement with your creditors to pay them a portion of what you owe. If your creditors agree to your offer, you would arrange a repayment schedule over a certain period of time to pay off the new agreed-upon debt, and you may be able to keep your house by avoiding bankruptcy.
Do note, that you’ll need to make an offer that provides your creditors with more money than they’d get if you declared bankruptcy. For example, if your creditors expect to receive $25,000 from the equity in your home, you’ll need to make a proposal for a greater amount than that.
Lose Your Home
In some cases, you may simply have to part with your home.
In this case, your trustee will arrange to have your home sold, and the proceeds of the sale will be distributed to your creditors. While this is unfortunate, filing for bankruptcy would help eliminate your debts and provide you with protection against creditors and collections.
Can I Sell My House To Avoid Bankruptcy In Canada?
If you want to avoid bankruptcy but are headed for financial ruin if you don’t, you may have considered selling your home. That way, you can protect your home from being repossessed and use the proceeds of the sale to pay off your debts.
However, there are potential issues with this course of action, especially if you wind up filing for bankruptcy in the near future anyway.
Sale Proceeds May Be Included In Your Bankruptcy
If you end up filing for bankruptcy, any proceeds from the sale of your home that exceed the home loan amount will be considered part of your assets. During the bankruptcy, the proceeds of the sale of your home may then be used to pay off your creditors.
The Sale May Be Contested
If you’re careless with how you spend the proceeds of the sale of your home before filing for bankruptcy, your creditors or the court could challenge the sale.
Failure To Disclose The Sale Could Lead To Criminal Charges
You’re required to disclose information about any property you recently owned before declaring bankruptcy. If you don’t disclose this information and it is found out, you could face criminal consequences. So, if you sell your home shortly before filing for bankruptcy, you’ll need to report the funds received to your LIT, as they could become a part of your bankruptcy estate that will be used to pay your creditors.
Can My Lender Foreclose My Home If I Declare Bankruptcy?
If you are up-to-date on all your mortgage payments, you can continue to hold your mortgage despite going bankrupt. In fact, under bankruptcy law, a mortgage lender cannot foreclose your home because you went bankrupt, given that you haven’t broken any rules of the mortgage agreement.
On the other hand, if you are behind on mortgage payments, your lender is not required to continue with the agreement. Regardless of your bankruptcy status, the lender can proceed with foreclosure of your mortgaged asset and sell your home.
Will I Lose My House If I Need To Renew My Mortgage?
Mortgage lenders are not permitted to repossess your home just because you’ve declared bankruptcy. This is prohibited under the Bankruptcy and Insolvency Act.
In terms of renewal, whether your lender will allow you to renew your loan depends on their specific policy regarding how they deal with renewals. That said, you might find it difficult to renew your mortgage because of your bankruptcy and current financial state.
However, if you have been diligent about making mortgage payments despite your bankruptcy, you should have no issues renewing your mortgage with your current lender. Usually, your lender will only turn you down for renewal if they think you’ll be at risk of defaulting. As long as you stay current with your mortgage payments during your bankruptcy, you should still be able to renew your mortgage.
Can I Apply For A Mortgage After Bankruptcy?
Fortunately, it’s still possible to get approved for a mortgage after bankruptcy. However, you’ll likely need to wait until your bankruptcy has been discharged first. If this is your first bankruptcy, you’ll be automatically discharged 9 months after filing.
Generally speaking, you may need to wait at least 2 years after being discharged to apply for a mortgage. That said, this time frame depends on the specific lender. Some lenders may want to see more time between the bankruptcy discharge date and mortgage application, while others may be fine with a shorter time frame.
As is the case with other loan types, mortgages typically require good credit for approval. This is also needed if you want to secure the lowest interest rate. For this reason, it’s important to start improving your credit score as soon as you can following bankruptcy to increase your chances of mortgage approval. Start by opening at least a couple of new credit accounts with major financial institutions to start rebuilding your credit.
Bottom Line
Bankruptcy is typically a last resort when it comes to unmanageable debt. Unfortunately, valuable assets may be seized, including your home. However, there are cases where your home may be safe from repossession when you file for bankruptcy, particularly if you have very little equity in the home.
