Secured Debts in a Bankruptcy

Secured Debts in a Bankruptcy

Understanding Secured Debts in a Bankruptcy Scenario

Secured debts are those which are backed by a collateral, for instance, your residence or automobile. It’s important to note that filing for bankruptcy does not absolve you of these debts. But, bankruptcy and secured debts can complicate matters. To gain clarity, consider these questions:

 

  • Are you current on your mortgage payments? If not, the lender can foreclose irrespective of your bankruptcy status. Most mortgages come with a standard clause that permits the lender to reclaim the property in the event of bankruptcy. However, this is not a common practice, especially with home loans, as it is often more profitable for the lender to continue with the mortgage (subject to your ability to make payments). A related point to consider is if you are up-to-date with your municipal taxes and utility bills. If not, the city or utility provider can put a lien on your house, converting these unsecured debts to secured.
  • What is the equity you hold in the property? For bankruptcy considerations, equity is the surplus of the property’s value over the amount you would have to pay if you were to sell it, including the mortgage balance, unpaid property taxes and utility bills, and legal and real estate fees associated with the sale. If the property’s value is less than the amount you would have to pay, you are in a situation of “negative equity”.
  • Are you interested in retaining the property?

 

The Fate of Secured Debts

If you are in negative equity or not interested in retaining the property, you can choose to default on the payments and relinquish the property to the creditor. In this case, the debt transitions into an unsecured debt, which can be discharged during bankruptcy.

If your equity is nil, the property stays out of the bankruptcy proceedings, and you can maintain ownership provided you continue with the mortgage payments.

If you have positive equity that exceeds the limit of its bankruptcy exemption value, the surplus is treated as an asset to be included in your bankruptcy estate. This could lead to your Licensed Insolvency Trustee seizing and selling the property. However, if you can arrange the required funds from an external source like your relatives, you could retain the property – along with the mortgage and the obligation to make payments.

Key Takeaways

In a consumer proposal, your secured debts and assets remain untouched. This is a significant advantage of a proposal over bankruptcy.

Post filing for bankruptcy, you are exempted from making payments towards your unsecured debts. As a result, you may have more funds at hand to pay your mortgage, property taxes, utilities, and car payments.

Calculating equity is a complex process – it’s not just about the “fair market value”. Provincial
bankruptcy exemptions further complicate equity calculations. This is a compelling reason to
seek advice from a Licensed Insolvency Trustee, who is adept at handling such intricacies.

Debt Resolution Assistance

For expert guidance on how your debts are impacted when you declare bankruptcy in Canada, get in touch with a Canada Licensed Insolvency Trustee. Your initial consultation is free of cost, and it’s the first step towards achieving financial stability.

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