Mortgages and Bankruptcy in Ontario: Know the Facts
A lot of our clients who have a mortgage choose to delay debt relief services because they are worried that it could affect their mortgage agreement or their home.
Filing for personal bankruptcy will automatically affect your assets, and that includes your home equity.
But does bankruptcy mean that you could lose your mortgage?
We believe that our clients need to understand better how mortgages and bankruptcy in Ontario work.
Knowing the facts about mortgage lenders and the insolvency process can help make the right decision for your financial situation.
Therefore, our bankruptcy experts have prepared a brief overview to guide their Ontario clients and protect their mortgage agreements in bankruptcy.
Bankruptcy and consumer proposal cover unsecured debts
Licensed insolvency trustees administer debt relief plans for unsecured debts.
Bankruptcy is one of those options.
The other one is the consumer proposal.
Unsecured debt is a debt that isn’t secured against an asset.
When you take a mortgage loan for your home, the property acts as collateral, which means that your mortgage is not part of your bankruptcy filing.
However, while the bankruptcy doesn’t need to list your mortgage for debt forgiveness, your home is an asset that can be part of the debt relief plan.
Can a lender cancel your mortgage if you become insolvent?
By law, your mortgage lender is not allowed to cancel your mortgage loan because you have filed a debt relief plan, whether bankruptcy or consumer proposal.
If your mortgage payments are up to date, there is no reason for the lender to cancel the mortgage.
However, if you have late payments, the lender can use the loan security to recoup their losses.
They can foreclose on the property to recover the money you owe, regardless of whether you are filing for bankruptcy or not.
The bankruptcy process considers your assets.
Homeowners will need a home appraisal and a mortgage statement to file for bankruptcy.
Depending on the equity, you may have to surrender the home to the trustee to pay off your creditors.
This will stop your mortgage when the property is sold.
Alternatively, you can choose to pay an amount equal to the equity if you wish to keep your home.
If you retain the property, the mortgage agreement carries on.
In some provinces, equity under a certain value, is exempt from seizure.
Therefore, the mortgage continues as usual.
Lenders can, however, make it difficult for homeowners in bankruptcy.
Most lenders charge additional paperwork fees to process a claim with the trustee.
Some may also not allow bankrupt borrowers to renew their mortgages with the same company.
How can you protect your mortgage in debt?
Bankruptcy can put your home at risk.
A consumer proposal, on the other hand, lets you keep your home and your mortgage.
When you file a consumer proposal, the value of your home is included in the payment terms to your creditors.
With payment terms lasting up to 60 months, the proposal offers a more manageable home equity protection for homeowners.
You may, however, still face paperwork fees and renewal issues.
Are you worried about how going bankrupt in Ontario can affect your mortgage?
Get in touch with an Ontario trustee to find the best way of protecting your home.