Will Bankruptcy Affect Shared Ownership in a Cottage?
Sharing ownership in a cottage can have multiple advantages, from dividing responsibilities to keeping the cottage in good working order, to being able to use it at different times of the year.
However, when one co-owner finds themself in a financially insecure situation, it can lead to challenges, concerns, and questions from the other owners.
If you or someone you know co-owns a cottage and one co-owner is in the beginning stages of declaring bankruptcy, you might be unsure how the bankruptcy could affect who the cottage belongs to.
Below, you’ll find how bankruptcy affects co-owned real estate, and what steps can be taken to make sure the cottage stays in the family.
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How does bankruptcy affect real estate?
A Licensed Insolvency Trustee is required by Canadian law to take all assets into consideration when someone files for bankruptcy.
This absolutely includes real estate, even when the personal residence or cottage is co-owned by a partner, family member, or spouse.
Canadian laws allow the exemption for principal residence if the total equity of the property is less than $10,000, which is quite rare.
How much is your cottage worth?
When someone declares bankruptcy, the cottage’s worth must be decided.
The entire fair market value of the cottage is decided in the following way:
- An independent appraisal is conducted.
- Any outstanding mortgage is deducted from the appraisal value.
- Any outstanding property taxes are deducted from the value.
- The equity is what remains of the appraised value after deductions.
If you own the property as an individual, the equity belongs to the creditors.
However, if the cottage is co-owned between multiple parties, the amount that belongs to the creditors is equal to the portion of the equity that the bankrupt individual “owns.”
After the equity of the cottage is determined, the individual declaring bankruptcy will likely go through negotiations to sell the equity to the other co-owners, or to an outside third party.
This does put a lot of strain on the co-owners.
The goal though is to have the cottage remain in the hands of the other non-bankrupt co-owners.
Things can get messy with families though, so sometimes the Licensed Trustee may obtain court approval of the sale.
Ideally, the sale can be worked out amicably between all the parties.
Don’t get caught up in fraudulence
If you are in a situation in which you need to declare bankruptcy, selling or transferring the family cottage for less than fair market value right before the bankruptcy will not be honored by the court.
Instead, the court will overturn and reverse these transactions.
If you choose to gift the cottage, the court may conclude that doing so prior to claiming bankruptcy is fraudulent.
The best idea is to retain ownership if possible until you file for bankruptcy, and allow the co-owners to purchase it after.
Retaining your share of the cottage
If you’re concerned with what will happen with your family cottage if you need to claim bankruptcy, Bankruptcy Canada’s experts can help outline the options you have.
A consumer proposal or debt consolidation are both options you may have that can help you retain your share of the family cottage.
Contact us today for a no-obligation consultation.
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