Bankruptcy can sound like an intimidating prospect, even if you’re deeply in debt. People worry about what they could lose by filing for bankruptcy, though they often ignore what they could lose if they don’t take action sooner than later.
One of the most frequently asked questions we hear as Licensed Insolvency Trustees is, “If I claim bankruptcy, what happens to my house?” Your home is naturally your top priority, but you may be able to clear your debts through insolvency without jeopardizing your home.
Often when people get into financial trouble, they prioritize their mortgage payments. It’s important to keep up with secured debt repayments, but if you’re falling behind on credit cards and unsecured loans, the time will come when you have to do something. If you start missing payments on unsecured loans, you could face wage garnishment or other legal actions that could hinder your ability to keep up with your mortgage. Filing for bankruptcy could even help you fix your finances and save your home.
We’re going to take a look at how you can keep your home even when you plan on filing for bankruptcy in Ontario.
Will I Lose My House If I File Bankruptcy in Canada?
The answer to this question depends on your financial circumstances. When you file for bankruptcy, your non-exempt assets are sold, and the equity is used to pay off your debts to unsecured creditors. Any amount owing that remains is then discharged.
Ontario has a $10,783 equity exemption on your principal residence. Second properties and vacation homes are all non-exempt, and you may have to sell in bankruptcy, but there are some protections for the property where you live.
This exemption has been in place since 2015. Since it’s relatively new, many are still not aware of it and worry about what will happen to their home if they have equity when they file bankruptcy.
What If Your Equity Is Above the Exemption?
With rising home prices across Canada, even recent homeowners may find that they have considerable equity in their homes. Not all equity comes from paying down your mortgage or making a substantial down payment; it can also be the result of rising property values. If your home’s value is more than $10,783 higher than your mortgage after deducting selling costs when you file for bankruptcy, you will have to pay the difference into your bankruptcy estate. Unless you can find the funds elsewhere, you may have to sell your home to do so.
Licensed Insolvency Trustees in Toronto can help you navigate this situation and find the best way forward. An important step is to have your home appraised. This way, you have an accurate assessment of your equity and whether or not you can afford to buy it out and keep your home. If you’re not able to keep your home, there are also other solutions, such as consumer proposals.
How to File Bankruptcy and Keep Your House
Your mortgage lender will not foreclose on your home if you file bankruptcy as long as you keep up with your mortgage payments. Bankruptcy only discharges your unsecured debts, such as:
- Credit card balances
- Payday loans
- Student loans (once they are eligible)
- Lines of credit
- Unpaid invoices
As long as your equity is under the exemption limit, your home will not be affected. Your top priority should be paying your bills when you file for bankruptcy. Debt relief should offer a way forward that will help you stay on top of essentials and secured debt payments like your mortgage. You can still claim bankruptcy and keep your home.
Selling Your Home in Bankruptcy
What if you’re behind on your mortgage payments and you simply cannot keep up, even after bankruptcy or a consumer proposal has reduced the monthly repayments you need to make on other debts? Financial struggles can reveal when a homeowner has bought more house than they can afford.
As a rule of thumb, financial experts suggest paying no more than 32% of your gross monthly income on your mortgage and housing costs (including mortgage interest and taxes), or 40% if you have no other debts to pay off (like an auto loan).
If you’re overburdened by your mortgage, selling can make a lot of sense. When you sell your home as part of bankruptcy proceedings, the equity you realize in the sale will be distributed to your creditors. If there is a shortfall between the sale price and your mortgage, the amount becomes unsecured debt which can be discharged through bankruptcy.
What Happens to Your RRSP Home Buyers Plan?
The Home Buyers Plan (HBP) was introduced to give prospective home buyers the ability to withdraw funds from their RRSP to buy a home and repay the borrowed funds within a 15-year period without having to pay taxes on the amount. First-time home buyers are allowed to withdraw as much as $35,000 and must repay it in annual installments.
If you do not repay your Home Buyers Plan back into your RRSP, the amount you owe for the year is added to your income and taxed accordingly. This will leave you with a higher tax bill than you were anticipating.
Even if you file for bankruptcy, you still have to repay the money you borrowed through the Home Buyers Plan. Effectively, it’s money you borrowed from yourself.
Speaking with a Licensed Insolvency Trustee is the best course of action if you’re dealing with the RRSP Home Buyers Plan and bankruptcy, as the situation can become complicated. It will help to have someone explain the details of the situation to you.
Should You Refinance Your Debt with Home Equity?
If you have enough home equity, you may also want to consider using that equity to refinance your debt. You could use a Home Equity Line of Credit (HELOC) to consolidate your debts, although this comes with its own risks.
This process means you’re converting unsecured debt into secured debt. You cannot file for bankruptcy or a consumer proposal on secured debt. If you fall behind on your HELOC payments, the bank or mortgage lender can foreclose on the property used as collateral, and you can wind up losing your home with little recourse.
If you are struggling to repay credit card debt now, you have to consider whether or not you will be able to keep up with HELOC payments. The interest rate may be more favourable, but if you have lost income or the total amount owing is unreasonable to pay off, you should consider a consumer proposal as a way to keep your home instead.
How a Consumer Proposal Can Help You Keep Your Home
Homeowners concerned that they have too much equity in their home or additional properties that are not exempt from bankruptcy have an alternative for getting out of debt: a consumer proposal. If it’s impossible to claim bankruptcy and keep your home, a consumer proposal is a different way to discharge your debt that can work as long as you are earning an income.
With a consumer proposal, you can offer a payout plan for equity in your home. Rather than having to pay a lump sum all at once or be forced to sell your home, you can make monthly payments with no interest charges. A consumer proposal will also stop collection calls and wage garnishments. You may also have a substantial amount of the money you owe discharged. When you have considerable assets that you don’t want to part with in a bankruptcy, consumer proposals protect your assets from creditors while you have an opportunity to get out of debt and back on your feet.
Can You File Bankruptcy with No Assets?
Some seeking help with their debt face a different problem than their homeowner counterparts. They don’t have any non-exempt assets, and they’re worried they won’t be able to file bankruptcy. Fortunately, they have no cause to worry.
If a person with no assets files bankruptcy, their creditors are still required to write off all of their outstanding debt. The person filing may still have to pay Surplus Income if they earn beyond a certain threshold. When you pay Surplus Income, you have to surrender 50% of all earnings above the threshold to the bankruptcy estate, which is then distributed to your creditors. This can last for up to 21 months. Depending on how much you earn, you may want to consider a consumer proposal instead.
You can claim bankruptcy and keep your home. A Licensed Insolvency Trustee will walk you through the process and make sure you know what you need to do to keep your home.