Key Takeaways
If you own a home and are struggling with financial debts, you may or may not be able to keep your home in bankruptcy, depending on the equity in your house. If you have equity in your house, filing a consumer proposal for your debts may be preferable instead of filing for bankruptcy.
There's a common misunderstanding that filing for personal bankruptcy or consumer proposal results in the forfeiture of all personal assets, including one's home. This isn't always the case. Depending on the specific circumstances, individuals may be able to file for consumer bankruptcy and still retain their house. This article will examine how home equity and mortgages are treated in bankruptcies and consumer proposals.
Understanding Bankruptcy
Bankruptcy is a legal process that offers financial relief to individuals or businesses unable to pay their debts. It involves liquidating assets to repay creditors and can provide a fresh financial start. However, the ability to retain your house during personal bankruptcy or when you file bankruptcy depends on several factors.
Equity and Bankruptcy
One of the determining factors is the amount of equity in your home. Equity refers to the difference between the market value of your house and the amount you owe on your mortgage and liens, if any. If the equity in your home is substantial, it may be considered an asset that can be used to repay your debts during bankruptcy.
Provincial Exemptions
Each province in Canada has its own list of exempt assets protected during bankruptcy. These provincial exemptions can allow you to retain some of the equity in your home during bankruptcy. Speaking with a Licensed Insolvency Trustee (LIT) is advisable to understand these exemptions for your specific province. In Ontario, the exemption amount is $10,000. This means if the net equity in your home after selling costs and mortgages is under this amount, you can keep your home.
Mortgage Payments
Another factor that comes into play is your ability to keep up with your monthly mortgage payments. If you can continue to make payments to your mortgage lender, you may be able to keep your house despite filing for bankruptcy. However, your lender may initiate foreclosure on your home if you're in arrears or behind on your payments. This means they will start the process of selling your house and use the proceeds to pay off their debts.
Consumer Proposal: An Alternative to Bankruptcy
A consumer proposal is a formal debt relief option that allows you to keep your assets, including your house. It involves making a proposal to your creditors to repay a portion of your debts over a specific period. This option can be particularly beneficial for individuals with significant home equity.
The Consumer Proposal Process
In a consumer proposal or bankruptcy situation, you offer a payout plan for any equity value in your home. This debt repayment plan allows you to spread your payments over a longer period, usually up to five years, with no interest charges. It provides a debt solution to keep your home, stop collection calls and wage garnishments, and have a substantial portion of your debt discharged.
Owning a Home in a Consumer Proposal
In a consumer proposal, your home remains yours as long as you continue making your mortgage payments. This is a significant advantage over bankruptcy, where the risk of losing your home is higher, especially if you have substantial equity. However, it's important to note that a consumer proposal may require you to pay more towards your debts than you would in bankruptcy. Creditors will review the equity in your house and will ensure they will receive at least the same amount they would receive if you filed for bankruptcy.
Selling Your Home in Bankruptcy
In some situations, selling your home can be a viable option. If you're behind on your mortgage payments and feel that even after personal bankruptcy, you can't afford your house, selling your home might be the best course of action. In such cases, any equity realized from the short sale of your home would be used by the bankruptcy trustee to repay your creditors for any debts you owe.
If you are struggling with your debts and own a home, you should follow these steps to see what is the best option for your financial situation:
Understand bankruptcy and its implications.
Evaluate the equity in your home.
Learn about provincial exemptions.
Assess your ability to make mortgage payments.
Consider a consumer proposal as an alternative.
Consult a Licensed Insolvency Trustee to discuss the options between bankruptcy and consumer proposals.
Bear in mind that every financial situation is different. It's vital to investigate all your debt solutions and make an informed decision.
Consult a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT) can help guide you through the bankruptcy or consumer proposal process. They can assess your financial situation, including the equity in your home, your income, and your debts, and recommend the best insolvency options for your specific circumstances.
Conclusion
Declaring personal bankruptcy in Canada, specifically in Ontario, doesn't necessarily mean losing your house. The equity in your home, your capacity to keep up with mortgage payments, and your province's bankruptcy exemptions can all influence whether you can keep your home. If there is equity in your home and you have unsecured debts you can't pay off, a consumer proposal would likely be the preferable option.
In deciding between a consumer proposal and significant bankruptcy in Canada, having equity in your home is usually a significant deciding factor. No one wants to be forced to sell their home, so a consumer proposal offers the same relief from your debts and the flexibility of deciding if and when to sell your home.
Don't let the fear of bankruptcy costs or the impact on your credit rating deter you from seeking the debt relief you require. If you are struggling with your debts and want to review the best option, contact Litvack Group. We are a Licensed Insolvency Trustee firm and would happily provide a Free Consultation.