Filing Bankruptcy and Owning a Home
How Does Filing Bankruptcy Impact Home Ownership?
Many homeowners might be thinking about how filing bankruptcy can affect them.
And while the exemptions vary province to province, it’s important to get an overall understanding of the impact it can have before going into the process.
Of course, with the guidance of a Licensed Insolvency Trustee (LIT), you’ll get a better understanding of this.
But to get you started, here is a brief guide that could prove to be invaluable.
As part of the bankruptcy process, some of your assets might be used to pay off your debts.
Handled by your LIT, they will distribute the funds that are received from the sales of the assets to the creditors that you owe.
But will you lose your home in the process?
Well, it will depend wholly on how much equity you have in the property.
If you have a lot of equity (e.g. you’ve already paid off the majority of your mortgage) then your home might be one of the assets that are sold.
In most cases, with personal bankruptcies, the house will be sold as people have a lot of equity. But that’s not always the case.
It’s also important to know that no matter what province you’re in, a percentage of the equity is protected under special bankruptcy exemption laws.
For example, in Alberta, if you have up to $40,000 of equity in your home it will be exempt.
Any further equity beyond that is considered to be an asset within your bankruptcy.
Alternatively, if you own your home with a partner or another party, the amount is reduced depending on how much of it you personally own.
High ticket items within the house might also be protected, such as tools or clothing.
The amount as with equity depends on the province that you’re in.
When filing for bankruptcy, you might also come across the term ‘lien’.
To put it simply, this is a form of security interest that’s granted over a particular item of property as a way of securing the payment for a debt.
In terms of bankruptcy, any liens that exist on your home will be counted against any equity that you have on it if you’re not currently up to date with any of your property taxes or bills.
The debt that you owe could be added to your tax roll, changing the debts to secured rather than unsecured.
If you have little equity in your home
But what happens if you have little equity in your home?
This might be the case if you’ve just re-financed or mortgaged your property.
Usually sitting around the 20% mark, it gives you more protection and a higher chance of keeping your home.
This is only the case, however, if you can still make your mortgage payments while finding a way to repay your debt.
To clear up any confusion surrounding this, it’s a good idea to get in contact with a LIT and discuss your options.
However, if you don’t want to keep your home and are happy to give it up as a means of paying for your debts, you can simply stop making the payments on it.
This allows the lender to foreclose on your mortgage.
If the lender doesn’t receive all that they are owed from this, it will be filed as an unsecured claim within the bankruptcy.
When the bankruptcy process then comes to an end, this unsecured debt will be discharged.
How to calculate equity
As a homeowner, it’s also important to realize how much equity you have in your home.
You can do this by looking at the value of your home and subtracting the amount that’s owed on the mortgage along with what you owe in property tax.
A simple calculation, it will show you the likeliness of being able to keep your property while bankrupt.
Of course, your Licensed Insolvency Trustee will advise you to get a professional appraisal done on your property during the assessment process to give you an accurate equity result.
A Consumer Proposal – the answer to your bankruptcy worries?
You might be surprised to know that there could be a solution – a Consumer Proposal.
An alternative to filing bankruptcy, it will allow you to keep your home with a significant amount of the equity while you start to regain your financial stability.
Showcasing to your creditors how you’ll repay your debts, you can spread it out over a longer period of time in comparison to filing for bankruptcy.
With a consumer proposal, however, you do run the risk of your creditors voting ‘no’ against it.
But because what you’re offering them tends to be more favorable than what you would offer in bankruptcy, the chances of this happening are low.
This results in a win for both you and your creditors as they get back the debt that you owe them, while you’re able to make affordable monthly payments and can keep your property.
One of the biggest benefits that comes with opting for a Consumer Proposal over bankruptcy, it’s something that should definitely be considered if you’re in financial trouble.
Future implications of a Consumer Proposal
You might also be wondering whether opting for a Consumer Proposal will affect you from purchasing a home in the future.
And you’ll be pleased to know that it doesn’t.
Even though it’s visible on your credit report for up to 3 years afterwards, you can still acquire a new mortgage if you’ve taken the right steps to rebuild your finances.
It’s important to understand that you won’t automatically lose your house if you’re up to date with your mortgage and at times declaring bankruptcy can even help you to keep it.
Eliminating other debts that you owe, you could focus wholly on the mortgage payments.
Find out more today
Do you want to find out more regarding the rules surrounding filing bankruptcy and owning a home?
Then get in contact with one of our local and Licensed Insolvency Trustees today.
Helping you to assess your unique financial situation and point you in the right direction, you’ll be supported from the start of the process until the end.