Compared with most types of loans, your mortgage payment probably consumes the most significant chunk of your monthly budget. Depending on your financial situation, you may struggle to keep up with your payments, so much so that you fear defaulting on your mortgage which could result in filing for personal bankruptcy and mortgage foreclosure.
Such a concern is warranted. If you fall behind on too many mortgage payments, your lender can legally take possession of your home through a legal process called foreclosure.
However, what if you were to file bankruptcy? Could doing so allow you to keep your house, or does your lender still have the legal right to seize it? Would you be able to discharge your mortgage along with other debts you owe?
In this article, we’ll explore how bankruptcy and mortgage foreclosure work and how each affects your ability to retain ownership of your home.Contact David Sklar
Bankruptcy and mortgage foreclosure – what’s the difference?
In Canada, bankruptcy and mortgage foreclosure are legal proceedings that stem from a borrower defaulting on their debt. In both cases, the borrower surrenders assets to satisfy unpaid debts. However, that’s where the similarities end.
Bankruptcy is a government-regulated insolvency process that allows you to legally discharge your debt. It requires you to assign your assets to a Licensed Insolvency Trustee, who then organizes the disbursement of payments to your creditors.
What’s important to remember is that bankruptcy works to eliminate only unsecured debt, a type of debt for which you’ve not pledged any collateral. Examples of unsecured debt products are credit cards, lines of credit, and personal loans.
A mortgage foreclosure entitles your lender to seize your home when you’ve stopped making your mortgage payments. Once the lender assumes ownership of your property, they can rent or sell it to recover their money.
Unlike a credit card or personal loan, your mortgage is a form of secured debt, with your home functioning as collateral. This feature provides your lender with a layer of financial security in case of a default. Instead of garnisheeing your employment income to settle the unpaid balance, they can immediately sell your home and collect the money.
Since a mortgage is a secured debt, you cannot discharge it through bankruptcy. As a result, your home would still be vulnerable to foreclosure.
The mortgage foreclosure process in Canada
If you miss too many mortgage payments for an extended period, your mortgage lender can sue you. If the court rules in their favour, they’ll be able to gain control of the title to your property, meaning they now legally own your home.
The foreclosure process consists of the following steps:
Step 1: Your lender will file a claim with the court, for which you have 20 days to dispute.
Step 2: If you fail to respond within 20 days with a legitimate defence, the court will deem your mortgage to be in default.
Step 3: Your lender will apply to the court to authorize a foreclosure.
Step 4: The court will grant you a specific period of time (through the issuance of a Redemption Order) in which you can settle your missed payments. In general, you’ll have up to six months to get your mortgage account current, though you can ask the court for an extension.
Foreclosure is a drawn-out and convoluted procedure – it can take anywhere from 6 to 10 months to complete.
How filing for bankruptcy affects your ability to keep your home
As mentioned previously, a mortgage is a secured debt, so it’s not possible to eliminate it through bankruptcy. You’re still obligated to make your payments or risk foreclosure. However, that doesn’t mean your home is entirely at the mercy of your mortgage lender.
Filing for bankruptcy doesn’t automatically grant your lender any special privilege to void your mortgage contract. Bankruptcy laws in Canada specifically disallow them from doing so. You’re entitled to keep your home as long as you meet your mortgage payment obligations.
Once the bankruptcy process ends, you’ll be free of any unsecured debt that hindered your ability to service your mortgage. With a lighter debt load, you’ll have more cash available to dedicate to mortgage payments.
The result is a win-win for you and your mortgage lender.
Exempt vs non-exempt home equity
If you file for bankruptcy, you may need to surrender a portion of your home equity to secure ownership of your property. Canadian bankruptcy law classifies home equity into two categories:
Exempt equity – the portion not available to creditors
Non-exempt equity – the portion available to creditors
You’ll have to pay the cash equivalent of your non-exempt home equity to your Licensed Insolvency Trustee. They’ll forward these funds to your creditors to settle your outstanding debt.
The amount of home equity exempt from creditors under a bankruptcy proceeding differs in each province and territory.
For example, in Ontario, the threshold is $10,000. If your home equity exceeds this amount, you’ll have to pay the non-exempt portion; otherwise, your creditors can legally seize your home.
What happens if you give up your home after declaring bankruptcy?
Suppose your circumstance is dire enough that you decide to give up your home to your mortgage lender. Are you absolved of any further financial obligations to them?
The answer is yes. Your home is now the lender’s responsibility – and they assume all the risks with its ownership.
Let’s say your lender sells the home at a loss. In that case, they can’t sue you to recover the difference between the mortgage balance and sales proceeds.
Though foreclosure passes all the financial risk to your mortgage lender, you’re not necessarily off the hook financially. You may still be the recipient of a lawsuit brought forth by the mortgage insurer (if the mortgage was insured).
For example, suppose you surrender your home to your lender in which the Canada Mortgage and Housing Corporation (CHMC) insured the underlying mortgage. The remaining mortgage balance is $300,000, and your lender sells the property for $275,000, resulting in a loss of $25,000.
Your lender would then file a claim with the CMHC to cover the shortfall. In turn, the CMHC could pursue legal action against you to recover the $25,000 they had to pay out to your lender.
Tips for avoiding mortgage foreclosure
Here are some options you can explore to minimize the chances of foreclosure due to past-due mortgage debt.
- Extend your amortization period. Suppose you have a 20-year amortization period. In that case, you can ask your lender to restructure your mortgage with a longer amortization schedule, say 25 or 30 years. The result is smaller monthly payments since your total debt is payable over a longer time frame.
- Transfer your mortgage to a new lender. As with any product or service, it pays to shop around for the best deal. Inquire with competing mortgage lenders about the interest rates and terms they offer.
- Refinance your mortgage. If mortgage interest rates are dropping across the country (and you have substantial home equity) it might be a good time to consider refinancing your mortgage. You can make your monthly payments more affordable by securing a lower rate.
- Ask for a payment deferral. Most people are unaware that you can negotiate with mortgage lenders to extend payment due dates. Let’s say you’ve been a loyal customer of your mortgage lender for a lengthy period. In that case, you can leverage that relationship by asking for a payment deferral. Just remember to be honest, diplomatic, and courteous when negotiating.
- File a consumer proposal. A consumer proposal is a bankruptcy alternative. It has a less severe impact on your finances as your assets, including your home, are protected from seizure by creditors. A Licensed Insolvency Trustee will negotiate a reduced debt payment plan with your creditors on your behalf. In doing so, you’ll have more funds at your disposal to sustain your mortgage payments.
Should you file for bankruptcy if your mortgage is on the brink of foreclosure?
Most people who fall behind on mortgage payments do so because other debts are holding them back: credit cards, lines of credit, payday loans, etc.
If this situation describes you, filing for bankruptcy can give you the financial boost you need to get your mortgage in good standing. While bankruptcy doesn’t directly shield you from mortgage foreclosure, it’ll relieve you of the financial pressure that comes with carrying high-interest, unsecured debt.
Once the dust settles, you’ll be left with enough room in your budget to catch up with your past-due payments – and get out of mortgage debt sooner.
That being said, the non-exempt portion of your home equity is still up for grabs by creditors during bankruptcy. Depending on your property’s value, this amount can be quite steep.
For this reason, a consumer proposal is an alternative option worth investigating.
One of the main advantages of filing for a consumer proposal is that you don’t need to surrender any assets, including your home. Instead, you’ll be able to negotiate a reduced debt repayment plan with your creditors.
If you’re in danger of losing your home to foreclosure, a Licensed Insolvency Trustee that can help you explore your options for getting your debt under control.
A Licensed Insolvency Trustee is the only financial professional in Canada with the knowledge, expertise, and authority to guide you through a bankruptcy or consumer proposal. With their help, you can discover the best route to take to safeguard your home.
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