The good news is that many people declare bankruptcy, and it doesn’t affect their mortgage.
As it’s a secured debt, a mortgage is not included in your bankruptcy; only unsecured debts are eliminated.
So here’s the deal: depending on where you live in Canada, there are rules on home equity. Either the equity must not exceed a certain amount, or all equity is considered an asset of your bankruptcy estate.
So if you’re looking to learn more about how bankruptcy affects your mortgage, then let’s look at some possibilities.
How does bankruptcy affect my mortgage?
If you have a mortgage and you’re considering bankruptcy, provincial legislation dictates how home equity is treated if you file.
Home equity is the amount of money you would receive if you sold your home.
In some provinces, you can keep some of that home equity. In some provinces, you cannot keep any equity whatsoever. Nevertheless, there are ways to ensure that you keep your home.
Let’s get this out of the way up front: if you are behind on your mortgage payments, your lender can start foreclosing procedures and sell your home regardless of whether you file for bankruptcy or not.
If you are up-to-date with your payments, there are two scenarios to consider.
No home equity when declaring bankruptcy
Not having equity in your home means there is no money to be made by selling your home.
This means that your home is safe as long as you continue to fulfil your mortgage payments and pay your property taxes.
Home equity when declaring bankruptcy
If you have equity in your home, creditors know that you can essentially borrow from it. There are limits on home equity in some parts of Canada when filing for bankruptcy, commonly known as bankruptcy exemptions.
So let’s say you live in Ontario. When filing for bankruptcy in Ontario, you can keep $10,000 of equity in your home. This means that if your home equity is less than $10,000, you have no seizable equity, and your home is safe.
To keep your home, just continue to pay your mortgage payments and property taxes.
Alternatively, if your home equity exceeds the exemption limit in your province, you must pay this surplus equity to your creditors through your bankruptcy to keep your home.
If there is no exemption at all, you have the option to pay the positive equity into your bankruptcy estate to keep your home, with payments spread out over your bankruptcy term.
If you cannot afford to pay this surplus equity, you could consider the following:
- Selling your home.
- Re-mortgaging your home.
- Filing a consumer proposal.
A consumer proposal can protect your home
In a consumer proposal, you offer to pay more to your creditors than they would receive if you declared bankruptcy. By doing so, you can keep your home.
While you will pay more than you would in bankruptcy, you can spread out your payments over five years, giving you more time to pay than bankruptcy allows.
The great thing about a consumer proposal is that your payments are affordable, and the monthly payment will never increase, which can happen in bankruptcy.
Additionally, your creditors are satisfied because they receive more than they would have if the trustee had sold your home through bankruptcy proceedings.
Under certain conditions, you can keep your home and continue to pay your mortgage if you file for bankruptcy.
To determine whether bankruptcy will affect your mortgage, you must consult with a Licensed Insolvency Trustee.
Under the Bankruptcy and Insolvency Act, you must appoint a Licensed Insolvency Trustee if you want to file for bankruptcy or enter into a consumer proposal. Only a trustee can discharge you from your debt and offer creditor protection.
During your consultation, all available options are explored by your trustee. Your trustee will also consider a consumer proposal as an alternative to bankruptcy if you own your own home.
You can rest assured that you will receive expert, impartial advice by talking to a trustee.
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