How Bankruptcy Impacts Home Equity
Bankruptcy can be a daunting process, riddled with complexities and uncertainties. One of the main concerns for individuals declaring bankruptcy is their house equity. This article aims to shed light on how house equity is treated during bankruptcy and the alternatives available to homeowners.
Understanding House Equity in Bankruptcy
A common misconception is that when an individual declares bankruptcy, they lose everything, including their homes. However, the reality can be different. The house often falls under the category of bankruptcy estate. The bankruptcy trustee is responsible for distributing this estate among the creditors.
The house’s equity plays a crucial role in determining whether the trustee will sell the house or not. If there is no or minimal equity after accounting for the mortgage payout and estimated selling costs, the trustee might release the house back to the individual. On the other hand, if there is significant equity, the trustee might negotiate a settlement with the individual, allowing them to keep the house by paying the equity’s value to the trustee.
The Shift in Value Determination
The method of determining the value of bankruptcy assets has recently seen a shift. The value was traditionally determined at the time the individual filed for bankruptcy. However, a recent court ruling in Lepage (Re), 2016 ONCA 403, has changed this practice. The court stated that the trustee should determine the value of the asset at the time the individual is discharged from their bankruptcy.
This shift implies that if the value of the house increases during the bankruptcy, the increase in value becomes an asset for the creditors. The trustee must collect this appreciation for the creditors, which can be a significant change for individuals who take a while to get discharged from their bankruptcy.
Real Estate Surge and Its Impact
Ontario has witnessed a surge in real estate values over the past few years, leading to an increase in home equity for many bankrupt individuals. This increase has led to a situation where individuals who thought they had settled their house equity with their trustee are now required to pay their debts in full. This is to prevent the trustee from selling their house to comply with the Lepage decision.
The Rise of Consumer Proposals
To keep their homes, many individuals faced with paying their debts in full are opting for consumer proposals. A consumer proposal can be filed by a bankrupt person before they are discharged. If accepted and approved, the bankruptcy will be annulled.
Consumer proposals are seen as a better alternative to bankruptcy for several reasons. They are less damaging to the credit report and might result in less fees and costs. While bankruptcy stays on the credit report for seven years, a consumer proposal remains for only three years after it is fully performed.
The Future of Bankruptcy and House Equity
With the uncertainty surrounding house equity increase during bankruptcy, especially in a rising real estate market like Ontario, many people might hesitate to file for bankruptcy. Instead, they might consider other options like filing a consumer proposal, which does not involve potential equity amount increases over time.
Conclusion
Bankruptcy is a complex process that requires careful consideration and planning. It is crucial to understand how house equity is treated during bankruptcy and to explore all potential options. For those struggling with consumer debt or tax debt, professional advice from a Licensed Insolvency Trustee can be invaluable.
Remember, time is money, especially in a rising real estate market. Don’t hesitate to seek help and explore your options.
