Do you feel overwhelmed by your debt? Are you constantly falling behind on your payments? If so, each passing day can leave you worried, anxious, and desperate for help. Perhaps you are at the point where you’re considering filing for bankruptcy. If that’s the case, you may be wondering if you will lose your house if you file for bankruptcy.
We don’t blame you, as your home is likely the most valuable asset you own. Losing it could be financially and emotionally devastating.
In this article, we’ll explain the factors that determine whether you lose your house if you file for bankruptcy. We’ll also explore an alternative debt relief strategy that can help reduce your debt but ensure your home remains safe from the clutches of your creditors.
How declaring bankruptcy impacts your house
Bankruptcy is a federally regulated debt relief program that allows you to discharge unsecured debts. These include credit cards, lines of credit, payday loans, and tax debt.
But to resolve your unsecured debt obligations, you must surrender some of your assets to your creditors. Doing so allows them to recoup at least a portion of the money you owe them.
One of the assets you must give up is your home equity, which represents your home’s value minus your current mortgage balance. The amount of home equity you possess is the primary factor that affects your ability to keep your house through bankruptcy.
How your home equity determines whether you can keep your house when filing for bankruptcy
Depending on how much equity you have in your property, you may need to pay out a portion of it to your creditors. This requirement may or may not necessitate you having to sell your home.
Each province and territory have rules that outline which assets you get to keep during bankruptcy. These exemptions ensure that individuals going through bankruptcy aren’t left destitute and have the means to rebuild their lives.
For example, under Ontario law, any equity in your home up to $10,783 is exempt, meaning it’s not legally payable to creditors. This threshold only applies to your primary residence – second residences and vacation homes don’t qualify. However, if your home equity is more than $10,783, there is no exemption at all and all the equity is up for grabs by your creditors.
Your Licensed Insolvency Trustee will assess how much, if any, of your home equity you’ll need to pay out. They’ll employ the following formula:
Home equity = current market value of your house – remaining balance on your mortgage – unpaid property taxes
Below are three ways that pursuing bankruptcy can affect the fate of your house. Note: The calculations below also would involve subtracting the transaction costs incurred to sell your home. But we’ll ignore these for simplicity and because you likely do not want to sell your house.
Scenario #1 – Your home equity is lower than $10,783
You own a house worth $450,000, your mortgage balance is $442,000, and you owe $3,000 in property taxes. Therefore, your home equity is $5,000 ($450,000 – $442,000 – $3,000).
Since this amount doesn’t exceed the threshold of $10,783, you’re not required to pay out any portion of your home equity to your creditors. As a result, you get to keep your house with no further financial obligations (except to continue paying your mortgage and property taxes, of course).
Scenario #2 – Your home equity exceeds $10,783, and you have the funds to pay the non-exempt portion
You own a house worth $450,000, your mortgage balance is $405,000, and you owe $3,000 in property taxes. Therefore, your home equity is $42,000, which exceeds the threshold. As a result, you’d have to pay your creditors $42,000.00.
Let’s say you’re able to scrape up enough money to settle this hefty “buy out.” In that case, you’ll be able to keep your house.
Scenario #3 – Your home equity exceeds $10,783, and you lack the funds to pay the non-exempt portion
Suppose you lack the funds to pay the non-exempt portion of your equity. In that case, you’d need to sell your home. Your Licensed Insolvency Trustee will assist you in arranging the sale of your house and distributing the proceeds to your creditors.
Can your mortgage lender seize your house if you file for bankruptcy?
If you stay current with your mortgage payments throughout bankruptcy proceedings, your mortgage lender can’t legally repossess your home. Regulations under the Bankruptcy and Insolvency Act (BIA) prohibit them from seizing your property merely because you’ve filed for bankruptcy.
However, let’s say you fall behind on your mortgage payments for too long. In that case, your mortgage lender can legally take possession of your house through foreclosure. Or they can force you to sell through a power of sale and use the proceeds to settle your mortgage.
Should you file for bankruptcy if you’re a homeowner?
Generally, if you have a large amount of equity in your house, bankruptcy is an unfavourable debt relief solution. The reason is that you likely can’t afford to “buy out” the non-exempt equity. In such a scenario, you’d have little choice but to sell your house to generate the funds necessary to cover the balance.
Conversely, if you have little equity in your house, the more you stand to benefit from bankruptcy. In this instance, you’ll likely have enough money to pay out the non-exempt portion of your equity. Thus, you can safely discharge your unsecured debts without the risk of losing your house.
Looking for debt relief but worried about losing your house? Here’s why you should consider a consumer proposal over bankruptcy
Most people are familiar with bankruptcy, but a consumer proposal is another federal-regulated debt relief option available in Canada.
When you file a consumer proposal, you’ll have the opportunity to negotiate a new repayment plan with your unsecured creditors. Depending on your circumstances, you may be able to reduce your balance owing by up to 80%. As a result, you’ll be left with a much lighter debt load, allowing you to meet your remaining payment obligations without a hitch. Try out our consumer proposal calculator to see how much debt you can eliminate.
A notable feature of a consumer proposal is that you can keep your assets, including your house. This feature makes a consumer proposal a superior alternative to bankruptcy, especially if you have a large amount of equity in your home. You will still need to pay your home equity into the proposal to satisfy your creditors, but you will have five years over which to spread the payments.
If your unsecured debts are suffocating you financially, it’s vital to act quickly to get them under control. Otherwise, you may also fall behind on your mortgage payments, putting your home in jeopardy.
Never let the fear of losing your home in bankruptcy prevent you from finding a solution – it’s possible to tackle your debt problems without putting your home at risk.
Book a meeting today with a Licensed Insolvency Trustee to discuss your debt relief options. With their guidance, you’ll gain the insight to determine whether bankruptcy or a consumer proposal is the ideal solution to your debt woes.