Bankruptcy and Homeownership in Canada – Understanding the Immediate and Long-term Impact

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There are several key factors about bankruptcy and homeownership in Canada that can shed light on how financial insolvency impacts your property rights and ownership and the legal and economic considerations involved both immediately and in the long term.

If you’re drowning in debt and you’re starting to fall behind on your credit cards and other bills, and you worry that you may soon also fall behind on your mortgage payments, you start to worry that you may lose your home.

It costs a lot of money to own and manage a home. There are mortgage payments, property taxes and home insurance to consider. On top of this, you also have maintenance and repair expenses, utilities, and, in some cases, homeowners’ association fees to take into account. These ongoing and one-time costs are crucial for managing homeownership effectively.

However, if you’re experiencing severe financial stress, and the only solution may be a personal bankruptcy, you then find yourself asking the commonly asked question: What will happen to my house after filing bankruptcy?

Bankruptcy in Canada can significantly impact homeownership, and the effects vary depending on individual circumstances. Here’s a general overview:

Immediate Impact on Homeownership

Immediate impacts include the risk of losing your home if you can’t keep up with mortgage payments and potential equity claims by the bankruptcy trustee.

1. Impact on Mortgage

• Current Mortgage – Bankruptcy does not automatically discharge mortgage debt. If you’re up-to-date on your mortgage payments, filing for bankruptcy does not mean you will automatically lose your house. If you have very little equity in your home, (this will vary in each province’s Bankruptcy Exemptions laws), you might still be able to keep your house and continue making mortgage payments. This is possible if you can find a way to pay this amount on top of bankruptcy payments. For most people, the problem isn’t the mortgage itself but rather the credit cards, lines of credit, payday loans, and other bills. Keep note that bankruptcy can eliminate your unsecured debt and lower your debt payments enough each month, making it easier for you to meet monthly mortgage payments.
• Missed Payments – If you’ve missed mortgage payments before filing for bankruptcy, the lender might initiate foreclosure proceedings. Bankruptcy may not prevent a foreclosure if you’re already behind on payments. If you’re falling behind, it’s a good opportunity to consider whether you want to keep your existing mortgage. If you determine that even after filing bankruptcy you still cannot afford your house, you can choose not to keep the home and allow the bank to proceed with foreclosure. Any remaining debt after the home is seized and sold will be discharged as part of your personal bankruptcy.

2. Equity in Your Home

In Canada, there are exemption limits that allow you to keep some of the equity in your home when you file for bankruptcy.These exemptions for home equity vary by province.

You can check here – Bankruptcy Exemptions by Province

If your home is in Ontario, for instance, the exemption for a principal residence is $10,783. This means that your principal residence (the home where you live) is generally protected up to a value of $10,783. However, if your home’s equity exceeds the exemption limit, your Licensed Insolvency Trustee might require you to either sell the property or buy back the equity.

The basic premise is that if you have built up equity in your home the law requires you to use that equity to pay off some of the money you owe to your creditors. So, if your house has substantial equity, the Trustee will typically seize and sell it to satisfy your debts.

Still, in certain cases, if the equity in your home exceeds the provincial exemption amount, it doesn’t necessarily mean you’ll automatically lose your home if you declare bankruptcy.

This could be dealt with in a few ways, such as:

1. Even if you have significant equity in your home, you may still be able to keep your home by arranging to repay the equity. This could involve borrowing from friends or family, or securing a second mortgage to buy back the equity from the Trustee.
2. Filing a Consumer Proposal instead of a bankruptcy.
3. If a homeowner decides not to keep their home, they can choose to sell the property through the bankruptcy process. They will still be entitled to receive their exempt equity amount from the sale proceeds.

Protecting Your Home

1. Principal Residence Exemption
   If the equity in your home is equal or less than the provincial exemption limit, your home is considered exempt from seizure, meaning it cannot be taken as part of the bankruptcy proceedings. This exemption allows you to retain ownership of your property despite the bankruptcy.However, if the equity in your home exceeds the exemption limit, your home is not exempt from seizure. In this case, the excess equity may be subject to seizure by the LIT. The trustee may sell the property to recover the amount above the exemption limit to satisfy your debts.

2. Continuing Payments
   If you are able to make mortgage payments consistently and have sufficient income, you might be able to keep your home throughout the bankruptcy process.

3. Keep your House by Filing a Consumer Proposal
   One of the most effective ways to keep a home with substantial equity when facing financial difficulties is to file a consumer proposal.

In a consumer proposal, you present a repayment plan to your creditors that covers the equity value in your home. Unlike bankruptcy, a consumer proposal allows you to spread these payments over a longer period.

For instance, if bankruptcy would require you to pay $15,000 from your home equity, you could propose to pay $20,000 over 50 months at $400 per month. Creditors might accept this offer since it provides them with more than they would receive through bankruptcy. Meanwhile, you benefit by keeping your home and managing a more affordable monthly payment.

Impact on Future Homeownership

• Credit Score
  Bankruptcy significantly impacts your credit score, often dropping it below 500. This can make it challenging to secure new mortgages or obtain favorable interest rates. The bankruptcy will remain on your credit report for up to 6 to 7 years, which can affect your ability to buy a new home during this period.
• Rebuilding Credit
  After bankruptcy, rebuilding your credit is crucial if you plan to purchase a home in the future. This involves demonstrating responsible financial behavior, such as paying bills on time and managing credit responsibly.
• Mortgage Application
  Lenders will scrutinize your financial history and might be hesitant to approve a mortgage application for someone with a recent bankruptcy. You might need to provide a larger down payment or accept higher interest rates.

Long-Term Considerations

• Impact Duration
  Bankruptcy affects your credit for up to 7 years from the date of discharge (or 14 years if it’s your second bankruptcy). During this period, your ability to obtain new credit, including mortgages, can be limited.
• Legal Advice
  It’s wise to seek legal advice to understand the full implications of bankruptcy on your homeownership situation. A licensed insolvency trustee (LIT) can provide guidance on how to manage your home and any potential ramifications.
• Financial Planning
  Engaging in financial planning and credit counseling post-bankruptcy can help you rebuild your financial standing and help you work toward future homeownership goals.

Navigating bankruptcy and homeownership in Canada can be complex. It’s wise to consult with a licensed insolvency trustee before making any decisions. A trustee can provide guidance tailored to your specific situation and help you understand the implications to your home and overall financial health after filing bankruptcy. A trustee can also help you understand all your options, including perhaps if you can use a consumer proposal as an alternative to bankruptcy to allow you to keep your home.

Our licensed insolvency trustees at Richard Killen and Associates can give expert advice on all your options to a debt-free life and ensure you will not be making your financial situation any worse. Contact us today.

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