Mortgage repayments often account for the largest part of our monthly expenses. Financial difficulties can lead to missed payments, escalating the fear of mortgage default, bankruptcy, and eventually foreclosure. This article aims to demystify the complex relationship between bankruptcy and mortgage foreclosure in Canada and offer insights into how bankruptcy can help protect your home.
Bankruptcy versus Mortgage Foreclosure: Understanding the Difference
In Canada, both bankruptcy and mortgage foreclosure are legal proceedings that arise due to unpaid debts. While there are similarities between the two, their impacts and proceedings significantly differ.
Bankruptcy: The Last Resort for Unsecured Debts
Bankruptcy is a government-regulated process that allows individuals to legally discharge their debt. Here, you assign your assets to a Licensed Insolvency Trustee who then manages the distribution of payments to your creditors. However, bankruptcy only addresses unsecured debts, which are debts not backed by an asset, like credit card debts, personal loans, or lines of credit.
Mortgage Foreclosure: The Implication of Defaulting Secured Debt
On the other hand, mortgage foreclosure is a legal process that allows your lender to seize your home if you default on your mortgage payments. Unlike unsecured debts, a mortgage is a form of secured debt, meaning your home serves as collateral, providing financial security to the lender. If you fail to make your mortgage payments, the lender can legally sell your home to recover their money.
The Mortgage Foreclosure Process in Canada
Foreclosure can be a daunting process. If you default on your mortgage payments, your lender can sue you. If the court rules in favor of the lender, they gain the legal title to your property, meaning they now own your home. Here’s a step-by-step walkthrough of the process:
- Your lender files a claim with the court. You have 20 days to respond.
- If you fail to respond with a legitimate defense within 20 days, the court declares your mortgage in default.
- Your lender applies to the court for a foreclosure order.
- The court grants you a specific period, usually six months, to settle your missed payments through a Redemption Order.
Foreclosure can take anywhere between 6 to 10 months to complete, making it a lengthy and complicated process.
Bankruptcy’s Impact on Homeownership
While a mortgage is a secured debt that cannot be eliminated through bankruptcy, filing for bankruptcy doesn’t necessarily mean you’ll lose your home. Even after declaring bankruptcy, your lender does not have the right to void your mortgage contract. By keeping your mortgage payments current, you can retain your home ownership.
In a bankruptcy situation, you may need to deal with any non-exempt equity in your home. If the equity in your home is above the exemption threshold, you’ll have to pay the equivalent to your Licensed Insolvency Trustee.
The Ramifications of Surrendering Your Home After Bankruptcy
If you surrender your home to your lender after declaring bankruptcy, you might still have financial obligations. Even though foreclosure transfers financial risk to your lender, you’re not necessarily off the hook. If the property is sold at a loss, the mortgage insurer (if the mortgage was insured) can sue you to recover the shortfall.
Strategies to Prevent Mortgage Foreclosure
Here are some strategies to minimize the risk of foreclosure due to past-due mortgage debt:
- Extend your amortization period to lower monthly payments.
- Transfer your mortgage to a new lender offering better terms.
- Refinance your mortgage to secure a lower rate.
- Ask for a payment deferral from your lender.
- File a consumer proposal to negotiate a reduced debt repayment plan with your creditors.
Should You File for Bankruptcy to Avoid Foreclosure?
If other debts are putting pressure on your ability to make mortgage payments, filing for bankruptcy can provide the financial respite needed. While bankruptcy doesn’t directly protect you from foreclosure, it does relieve the financial burden of high-interest, unsecured debt. Once your bankruptcy proceedings are complete, you’ll have more financial capacity to handle your mortgage payments.
However, non-exempt home equity is still accessible to creditors during bankruptcy. Depending on your property’s value, this amount can be quite significant. For this reason, a consumer proposal might be a better alternative. One of the main advantages of filing a consumer proposal is that you don’t need to surrender any assets, including your home. Instead, you negotiate a reduced debt repayment plan with your creditors.
If you’re at risk of losing your home to foreclosure, seek advice from a Licensed Insolvency Trustee. They can guide you through bankruptcy or consumer proposal processes and help you explore your options to manage your debt effectively.
Dealing with bankruptcy to stop foreclosure can be a complex process. However, understanding your options and seeking professional help can guide you towards making informed decisions and securing a debt-free future.
