Navigating through financial struggles is never easy, especially when it comes to matters of bankruptcy and mortgage foreclosure. In Canada, these legal processes are prevalent and can be quite complex to understand. This guide aims to shed light on the intricate details, differences, and implications of bankruptcy and mortgage foreclosure in the Canadian context.
The Distinction Between Bankruptcy and Mortgage Foreclosure
When a borrower fails to meet their debt obligations, they may face bankruptcy or mortgage foreclosure. While both are legal proceedings in Canada, they differ significantly in their processes and implications.
Bankruptcy is a government-regulated insolvency process that provides a legal discharge of your debt. In contrast, Mortgage Foreclosure allows your lender to seize your home when you’ve halted your mortgage payments.
Elucidating Bankruptcy
Bankruptcy involves assigning your assets to a Licensed Insolvency Trustee who then arranges the disbursement of payments to your creditors. It primarily targets unsecured debt—a type of debt for which you have not pledged any collateral. This includes credit cards, lines of credit, and personal loans.
Explaining Mortgage Foreclosure
Mortgage foreclosure is a legal process that enables your lender to take over your property if you cease making mortgage payments. Your property serves as collateral for your mortgage—a form of secured debt—which gives the lender a measure of financial security. This means that even if you file for bankruptcy, your home is still susceptible to foreclosure as secured debts, such as a mortgage, cannot be discharged.
The Procedure of Mortgage Foreclosure in Canada
The foreclosure process begins when you consistently miss mortgage payments. The lender can initiate legal action, and if successful, they gain control of your property’s title, effectively making them the legal owners of your home. The process unfolds as follows:
- The lender files a claim, which you have 20 days to challenge.
- Failure to respond results in a default declaration on your mortgage.
- The lender seeks court authorization for a foreclosure.
- The court provides a Redemption Order, giving you a specific timeframe to repay your missed payments.
Bankruptcy’s Effect on Home Ownership
While bankruptcy cannot eliminate a mortgage, it does not automatically grant your lender the right to cancel your mortgage contract. You can retain ownership of your home if you continue to meet your mortgage payment obligations. After the bankruptcy process concludes, the elimination of unsecured debt leaves you with more funds to allocate towards your mortgage payments.
Understand Exempt and Non-Exempt Home Equity
When filing for bankruptcy, you might have to surrender a portion of your home equity to maintain ownership of your property. The law separates home equity into two categories:
- Exempt Equity: The portion that is not accessible to creditors.
- Non-exempt Equity: The portion that is accessible to creditors.
What Occurs When You Surrender Your Home Post-Bankruptcy?
If your financial situation compels you to relinquish your home to your mortgage lender, you are released from any further financial obligations towards them. However, you may still face legal action from the mortgage insurer if the mortgage was insured.
Strategies to Evade Mortgage Foreclosure
Several strategies can help you avoid foreclosure due to overdue mortgage debt:
- Extend your amortization period.
- Transfer your mortgage to a new lender.
- Refinance your mortgage.
- Negotiate for a payment deferral.
- File a consumer proposal.
Considering Bankruptcy to Avert Mortgage Foreclosure
If other debts are impeding your ability to make mortgage payments, filing for bankruptcy can provide the financial relief you need to bring your mortgage up to date. However, the non-exempt portion of your home equity is still available to creditors during bankruptcy, making a consumer proposal an alternative worth considering.
How a Licensed Insolvency Trustee Can Assist
If you’re in danger of losing your home to foreclosure, a Licensed Insolvency Trustee can help you explore your debt management options. As the only financial professionals in Canada with the knowledge and authority to guide you through bankruptcy or a consumer proposal, they can help you determine the best course of action to protect your home.
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