One of the most common questions clients ask is, “Will I lose my home in a bankruptcy?”
It’s a valid concern. Many people dream about home ownership. With high prices, short supply, and intense bidding wars (especially in the Greater Toronto Area), getting into the real estate market is almost akin to winning the lottery.
Once you’re in, you want to stay in. But having a mortgage, paying property taxes, and keeping up with utilities can become a challenge, not to mention if you used a secured line of credit or credit cards to purchase new furniture. If you’re struck by sudden illness, job loss, or unexpected expenses, bill payments can get delayed. When your debt accumulates to the point where filing for bankruptcy is a real possibility, the fear of homelessness can become quite overwhelming.
The answer to “Will I lose my home in a bankruptcy?” is usually not…but it’s always a possibility.
Declaring Bankruptcy When You Own a Home
If you’re a homeowner who is considering bankruptcy, your licensed insolvency trustee must consider the net equity available from your house as a potentially unprotected asset.
Gross equity is calculated by subtracting the mortgage from your home’s value. In Ontario, a house is exempt from seizure if there is less than $10,000 of gross equity. For homeowners who live within Toronto, or in most of the Greater Toronto Area, this scenario won’t even apply.
In cases where there is significant equity, the trustee has the legal authority to seize your home, but in my 13 years as a licensed insolvency trustee I haven’t yet seized a house. We’d much rather see you stay in your home and recover financially than sell your home out from under you.
The question then becomes not one of if you can legally keeping your home, but rather if you can actually afford to.
For example, in recent years many homeowners have used the home equity lines of credit to cover their unsecured credit card bills and other debt. But as the market slows down and interest rates rise, this method of debt management becomes unsustainable. In this case, one needs to honestly reconsider if they can afford home ownership
If you both want and can afford to keep your home after a bankruptcy, we can work with you to develop solutions that can help, even in a negative equity situation.
Getting a Mortgage After Bankruptcy
For most people, the thought of losing their home is extremely difficult and upsetting. After all, no one enters the real estate market with the intention of losing their home to foreclosure.
However, there are ways to keep your home while you recover from bankruptcy. It’s even possible to secure funding to help you out of your negative equity situation while you rebuild your credit. It all depends on your individual circumstances.
For example, we helped one couple who were just returning back to work after suffering through health issues. They weren’t able to repurchase the net equity in their home, so we referred them to a mortgage broker who was able to arrange a second mortgage. They now have 12 months of funds to work with and a little extra time to rebuild their financial picture and hopefully keep their home.
If a second mortgage isn’t possible, you could always borrow the money from a family member and use it to buy back the net equity from your trustee.
In other cases, trustees may arrange for a home appraisal, for which clients reimburse them. Given the current housing market in the GTA, we always get an appraisal so we can get the equity numbers before devising a strategy. At that time, we explain to the client how we determined the net equity of their home, and make sure that they understand which options, including bankruptcy, are available to them, as well as how each option works before moving forward.
A consumer proposal is one of those options.
What is a Consumer Proposal?
Most trustees want to see you succeed and will recommend options that will allow you to live in your home during the bankruptcy period, or even avoid filing for bankruptcy altogether. If we determine there is a surplus when calculating net home equity, we may recommend a consumer proposal solution to avoid bankruptcy.
Consumer proposals are offers for modified payments we make to your creditors on your behalf. These offers can be flexible, varying from making lower payments over a longer period of time to only paying a certain percentage of what you owe.
Once we file the proposal, unwanted contact and aggressive actions from creditors cease, and upon its approval you can concentrate on rebuilding your credit through making regular payments under the terms of proposal.
You can also keep your assets after filing a consumer proposal, which means no seizure of your home. However, you may want to consider getting a second mortgage or exploring credit management strategies if money is tight during the repayment period. Defaulting on a consumer proposal can carry significant credit consequences.
Whether you’re planning to declare bankruptcy or file a consumer proposal, financial guidance concerning home ownership and Canadian bankruptcy laws should always be provided by a professional who can provide advice in a personal manner that takes your individual needs into account.
Are you a homeowner worried about overwhelming debt, and need a way to rebuild your credit? Since 2006, Charles Advisory Services has helped people in Toronto solve debt problems and develop credit management skills that help them avoid debt in the future. Contact us for a free consultation today!
TIP : Remember when your grandmother used to say, “Put money away for a rainy day”? Her wisdom still rings true. Keeping 2 – 3 months of household expenses in an emergency fund is a great way to ensure that your bills are covered in the event of a short-term crisis. A Tax-Free Savings Account (TFSA) is a great way to invest money but still keep it available if you need it in a pinch.