Can Bankruptcy Help if I am Underwater on my Mortgage?

If you owe more on your mortgage than your home is worth, you can have the mortgage debt erased in a bankruptcy. Many Canadians owe more on their mortgage than their property is worth, making their mortgage debt “underwater.” In Alberta and Saskatchewan there are non-recourse mortgages, which means that, you can walk away from your mortgages and the mortgage holder cannot come after you for any shortfall in the sale of the home. Note that if you have a CMHC insured mortgage you will be responsible for paying any shortfall on the sale of the home. Non-recourse mortgages are not in use in the rest of Canada so you must file bankruptcy or a consumer proposal if you wish to have any shortfall debt erased. Be careful, on how you conduct yourself. It’s very important that you follow your trustee’s advice to the letter. Failing that, you may find that the debt is not erased! Your Procedures – When you file the bankruptcy documents your trustee will advise the financial institution of your bankruptcy. To be safe, you should also write to the financial institution to advise them of your bankruptcy and the fact you are not going to be making your mortgage payments.

It is very important that you do not make any mortgage payments after you file bankruptcy. If you do make a mortgage payment it can be considered that you are reaffirming the mortgage debt, and the mortgage debt will not be erased in the bankruptcy.

The Financial Institution’s Procedures – The financial institution will contact their lawyer and the lawyer will start foreclosure proceedings.

Foreclosure Proceedings

A current valuation or an appraisal of the property is made to establish the value. Depending on the equity in the property or the anticipated shortfall, the lawyer, on behalf of the mortgage holder, will seek from the court an appropriate redemption period. i.e. the period of time the court will establish for which the property will be for sale before the owner will have to vacate and the time which potentially the mortgage holder can take control of the property. If there is a significant anticipated shortfall the lawyer for the mortgage holder will argue for no redemption period. If there is anticipated equity then the owner of the property will ask the court for a longer redemption period so the property can be sold in an orderly manner and not as a “fire sale”, thus allowing the owner to sell for as high a price as possible and therefore not suffer a loss or worse a shortfall. Typically the courts will grant a 6 month redemption period. Conduct of Sale is also a key issue. The court can grant conduct of sale to the owner or the mortgage holder usually dependent on the length of the redemption period. When a satisfactory offer has been received for the property the offer will be taken to court by the lawyer for the mortgage holder so the court can approve the sale. When you Vacate the Home – The lawyer for the financial institution will advise you when you have to move out of the house.