Your home is probably one of the most valuable investments you’ll make in your lifetime. Not only that, if you have a house, you’ve probably become attached to it and comfortable with your lifestyle there. If you’re going through bankruptcy, you may be wondering “will I lose my house if I file bankruptcy in Canada”.
It is likely that you’ll want to do whatever is in your power to keep your home. Fortunately, it is possible to keep your home when going through bankruptcy.
It’s common to assume that you will automatically lose your home when you file for bankruptcy. 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 amount of equity in your home will play a role in your ability to keep your home during bankruptcy. Your equity is calculated by subtracting your outstanding mortgage balance from the current market value of your home.
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).
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.
If you have very little equity in your home, 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.
For example, if you have a home worth $300,000 and you owe $280,000, you’d have $20,000 in equity. However, if you were to sell your home, the property taxes, real estate commissions and other closing costs would leave little to nothing left over. 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.
However, if you feel you’re struggling to pay your mortgage in addition to your other debt, you may need to consider other options, including selling your home. Selling your home can help you get out of debt, particularly if you have acquired equity since the inception of your mortgage.
If you have a sizable amount of equity in the property, you are at more risk of losing your home. However, there is still a way to keep it if you have a little cash available.
For instance, if your trustee 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.
If you have equity in your home and you can’t come up with the funds to buy it out, you have a few options to consider:
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.
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.
If you are up to date on all your mortgage payments, you can continue to hold your mortgage despite going bankrupt. In fact, under the 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 forward with the agreement. Regardless of your bankruptcy status, the lender can proceed with foreclosure of your mortgaged asset and sell your home.
A mortgage renewal is a new agreement made with your existing lender to extend the mortgage or renew the terms. You might find that it is difficult to renew your mortgage because of your bankruptcy and current financial state.
While there are some lenders that are no longer renewing mortgages in relation to bankruptcy, there are policies which state that if an individual has filed for bankruptcy, the financial institution will allow you to keep the mortgage until it matures. Once the mortgage matures, you will have to find a new lender.
All of that being said, if you have been diligent about making mortgage payments despite your bankruptcy, you should have no issues renewing your mortgage with your current lender. Banks prefer that you renew your mortgage if you’re a good customer because they don’t want to risk losing future profits in exchange for selling an asset at foreclosure price, losing the interest payments and principal repayment.
Debt of any kind can be overwhelming for anyone, bankruptcies especially. Bankruptcy is typically a last resort, so you may want to consider debt settlement or a consumer proposal first. This allows you to repay a portion of your debt and avoid losing your assets, including your home.
But if all other options have been exhausted, bankruptcy may be your only alternative.
How to calculate your home equity?
Equity is the difference between what an asset is worth and how much you owe for that asset, including mandatory fees such as property taxes and selling expenses (click here to learn more about home equity).
A consumer proposal is a better option than bankruptcy if your home has accumulated an immense amount of equity. Part of a consumer proposal is paying out the equity value of your home, the same as with a bankruptcy. However, with a proposal, the payments will be spread out over a longer period of time when compared to a bankruptcy. In addition, to make a consumer proposal more attractive, you can offer to pay more than the home equity value but still pay it back over a longer period of time.
If you are in the process of filing for bankruptcy, or already filed in the past, but you’re also looking to apply for a mortgage in the near future, here’s what you need to know.
Be sure to attain a discharge after your bankruptcy, a discharge means that lenders can no longer take action to collect the debts you owe. In addition, be sure to actively work toward improving your credit. It is possible to get a mortgage after bankruptcy as long as you re-establish yourself financially.
Debt of any kind can be overwhelming for anyone, bankruptcies especially. Bankruptcy is typically a last resort, so you may want to consider debt settlement or a consumer proposal first. This allows you to repay a portion of your debt and avoid losing your assets, including your home.
But if all other options have been exhausted, bankruptcy may be your only alternative.
Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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