Many people worry that they will lose their house in bankruptcy in Canada, but this is not always the case.
Going bankrupt doesn’t necessarily mean you’ll lose everything, and the good news is you can keep some possessions, giving you the foundations to start again.
Can you keep your house in bankruptcy?
In most cases, you can file for bankruptcy and keep your house in Canada.
Your trustee will consider the equity in your home. This is the amount of money you would receive if you sold your house.
Depending on where you live, you can keep some equity in your home when filing for bankruptcy. Where this is true, the equity must not exceed a certain amount.
Not everywhere has an exemption for home equity. In some provinces, all equity is considered an asset of your bankruptcy estate.
The most important takeaway here is that you don’t automatically lose your home if you go bankrupt, and a trustee can advise you on the best course of action.
If you have no equity in your home
If you have no equity in your home, you can keep your home during bankruptcy as long as you continue to pay your mortgage payments and property taxes.
After all, if you have no equity, it makes no sense to sell your home because the creditors will not receive any money.
If you have equity in your home
Here’s an example: if you file for bankruptcy in Ontario, you can keep $10,000 of equity in your principal residence.
So, if your home equity is less than $10,000, you have no seizable equity. If you continue to pay your mortgage payments and property taxes, you can protect your home if you go bankrupt.
Let’s look at another example. If you live in Alberta and decide to declare bankruptcy, you can keep $40,000 of equity in your principal residence.
That means if your home equity is $45,000, and you want to keep your home, the trustee requires you to pay the surplus equity of $5,000 into your bankruptcy estate.
Basically, if you have home equity that exceeds the exemption amount, you will need to pay this surplus equity to your creditors through your bankruptcy if you want to keep your home.
And if there is no exemption where you live, you have the option to pay the additional equity into your bankruptcy estate to keep your home.
While it may be expensive, it is possible to spread the payments over the duration of your bankruptcy.
If you cannot afford to pay the surplus equity
If you don’t have additional money to pay this surplus equity, your home could be seized by your Licensed Insolvency Trustee to be sold, with the money distributed to your creditors.
You could consider selling or remortgaging your home, but there is another way, through filing a consumer proposal.
Keep your home with a consumer proposal
If you cannot afford to pay surplus equity toward your bankruptcy, then a consumer proposal could be the ideal alternative.
Through a consumer proposal, you can offer a better deal to your creditors than they would receive if you filed for bankruptcy.
By offering to pay more than the surplus equity in your home, you can keep your home in a consumer proposal.
Yes, you will pay more than you would in bankruptcy, but you can spread the payments over five years. This gives you more time to pay, meaning your monthly debt payments are lower than they would be if you declared bankruptcy.
Plus, your creditors are happier because they will receive more than they would have if the trustee had sold your home through bankruptcy.
If you are behind on your mortgage payments
Unfortunately, if you’re behind on your mortgage payments, your mortgage lender can foreclose and sell your home regardless of whether you are bankrupt or not, so it’s important not to fall behind on your mortgage.
If you jointly own a home
If you jointly own your home and decide to file for bankruptcy, you will owe creditors a portion of the equity in the house.
The person who is not filing will keep their share of the equity, and this portion does not go to your creditors. This process may also apply to other assets, such as a vehicle.
How much equity do I have in my home?
To calculate your home equity, you must establish your property’s current market value through a home appraisal.
Once you have this value, use a home equity calculator or calculate it yourself by subtracting the amount you owe on your mortgage and any owed property taxes from your home’s appraised value.
Example: you owe $150,000 on a mortgage and £5000 in property taxes. Your house was recently appraised at $350,000, so your home equity is $195,000.
Property ownership determines what percentage of equity you have. For example, if your property is joint-owned, this would affect the amount of equity.
It’s possible to keep your house in bankruptcy
If you have lots of unsecured debt, like credit cards, payday loans and lines of credit, bankruptcy could give you a fresh start while allowing you to keep your house.
Each province and territory has rules that allow you to keep certain assets. In other words, your home, car and other assets can be protected when you file for bankruptcy under certain conditions.
If you are interested in filing for bankruptcy, get advice from a Licensed Insolvency Trustee to determine which assets you can keep.
Bankruptcy in Canada is not designed as a punishment. The aim is to provide a fresh financial start. Your trustee will also explore alternative options, such as a consumer proposal.
By talking to a trustee, you can be assured that you will receive impartial advice and the opportunity to regain some control over your debts.
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