Filing for Bankruptcy – Will You Lose Your House if You Declare Bankruptcy?

No one wants to declare Bankruptcy. It’s usually the last resort after all other options have been exhausted. But the purpose of bankruptcy is not to punish, it’s to give honest but unfortunate debtors who are down on their luck a second financial chance.

Facing Bankruptcy can be a scary thought. You wonder how it will affect your life and if you will lose your house if you declare Bankruptcy. If you’re like many Canadians, your house is your safe place. It’s where you make memories and raise your family. The thought of losing your home in a bankruptcy is devastating.

Here we answer all of your important questions about what will happen to your home and other assets if you file for personal Bankruptcy.

Is Your House Exempt From Bankruptcy?

One of the biggest fears around filing for Bankruptcy is that you’ll lose your home.

There are two main factors used to determine if you will lose your house if you declare Bankruptcy – home equity, and failing to make your mortgage payments.

How much equity have you built in your home?

Home equity is the amount of your home’s value that you own outright. It’s the difference between what your home is worth and how much you still owe on the mortgage.

For example, say you purchased your home for $400,000. The current market value of your home is $420,000, and you still owe $380,000 on your mortgage. Your home equity is $40,000.

Bankruptcy asset exemptions

In Canada, each province and territory has a list of assets that are exempt from Bankruptcy. This includes items like food, clothing, furniture, vehicles, and home equity.

If the amount of home equity you have is lower than the limits set by your province or territory, you can keep your home, providing you keep up with your mortgage payments.

For instance, in Alberta, your home is exempt if you have $40,000 or less in equity. In British Columbia, your home is exempt if you have $12,000 or less in equity and are located in the Capital Region or Metro Vancouver. If you live outside of these areas, the exempt amount is $9,000.

If you have more equity in your home than your province or territory allows, you’ll have to pay your creditors the additional amount. If you can’t afford to do this, you may have to sell your home.

Can you afford your mortgage payments?

While it’s possible to keep your house in Bankruptcy, you need to keep up to date on your payments. If you make a few late payments and then start to fall behind, or you fail to follow the terms of your mortgage agreement, you can default on your mortgage loan.

In this scenario, your lender has the right to recover the money you owe them. If you fall behind on your payments, your lender can legally take possession of your home to sell it to pay off the mortgage loan. This is called house foreclosure.

If you are at risk of defaulting on your mortgage, your bank should reach out to offer information and resources on mortgage relief options, or offer temporary relief which can include:

• Waiving prepayment penalties (if you decide to sell your primary residence)
• Waiving internal fees and costs for an amount of time
• Avoid charging interest for a limited time

Your bank may also offer to extend your amortization period (the total time you have to pay your mortgage). Extending your amortization period can lower your monthly payments but can also increase the total cost of your mortgage.

To see how extending your amortization will affect your monthly mortgage payments, you can use an online mortgage calculator from the Government of Canada.

How to Afford Your Mortgage Payments in Bankruptcy?

If you file for bankruptcy it’s likely because your debts have become unmanageable and you need to find relief. Even if it’s possible to keep your home in bankruptcy, you might be concerned if you can continue to afford your mortgage payments?

The truth is, in many cases, it can become easier to afford your mortgage payments. Since Bankruptcy can eliminate most of your unsecured debts, this can free up money to put toward your mortgage.

A requirement of a bankruptcy is that you have to attend two financial counselling sessions. The purpose of these sessions is to help you understand the root cause of your financial difficulty and to learn new money skills. Your LIT can teach you how to create a monthly budget and manage your credit, so you can keep on top of your mortgage payments and avoid taking on new debts.

Alternatives to Filing for Bankruptcy

If you want to avoid Bankruptcy, you may have other alternatives, including refinancing your mortgage and a Consumer Proposal.

Refinancing

If high mortgage payments are the primary source of your debt issues, you may consider refinancing. This involves replacing your existing mortgage with a new one that offers a lower interest rate or better terms.

Refinancing also gives you the option to access home equity which you can use to consolidate other debts.

Consumer Proposal

A Consumer Proposal is an alternative to filing for Bankruptcy. In a Proposal, you work with a LIT to create an offer to your creditors to pay a certain percentage of your debt, extend the time you have to pay, or both. Unlike Bankruptcy, you don’t have to sell any of your assets.

If your creditors accept your Proposal, you can reduce the amount of debt you have to repay. This can free up more money to put towards your mortgage loan.

If you have income and you’re still managing to pay your mortgage, a Consumer Proposal might be a good fit. However, if you’re dealing with significant debt and don’t have the income to make monthly proposal payments, Bankruptcy might be the best option.

Debt Relief Options: Speak to a Licensed Insolvency Trustee

Will you lose your house if you file for Bankruptcy? Not necessarily.

While you will have to give up some of your assets to repay your creditors, it’s possible to keep your home. A Licensed Insolvency Trustee can assess your financial situation and explain the bankruptcy asset exemptions in your province.

Licensed Insolvency Trustees offer the widest range of debt help options and are the only professionals in Canada who can legally administer formal debt relief solutions, including a Consumer Proposal or Bankruptcy.

For a free, no-obligation consultation, contact Allan Marshall & Associates at 1-888-371-8900 or- complete our online contact form to find an office near you. You don’t have to deal with debt alone, we can help.