For many, the thought of bankruptcy is daunting, primarily because they fear losing their most valuable asset – their home. The question, “What happens to my house if I declare bankruptcy?” is a common one. However, the answer isn’t straightforward and hinges on many factors, primarily the amount of equity in your property.
This detailed guide unpacks the possible scenarios you might face when declaring bankruptcy and offers insights into how to navigate this challenging financial landscape.
What is Equity and How Does It Affect Bankruptcy?
Equity is the difference between the market value of your home and the outstanding mortgage balance. This equity value plays a crucial role in determining what happens to your house if you declare bankruptcy.
The following are three potential scenarios:
- No Equity.
- Some Equity.
- Significant Equity.
No Equity
If the market value of your home is equal to, or less than, your mortgage balance, your home has no equity. In such situations, if you’re unable to make mortgage payments, the property may go into foreclosure, and the bankruptcy declaration can protect you from any arrears.
The critical point here is that you might keep your home, provided you continue making mortgage payments.
Some Equity
If you have some equity in your house, the situation becomes more complex. The amount of equity you have could impact whether you can keep your home after declaring bankruptcy.
For instance, in some regions like BC, a principal residence exemption exists, which allows you to shield a certain amount of equity from creditors. This means you might keep your home if the equity is within the exemption limit.
However, if your equity goes beyond the exemption limit, you must pay the excess into the bankruptcy estate. You could do this by making monthly payments, refinancing your mortgage, or seeking help from friends and family.
Significant Equity
When your home has substantial equity, keeping it after declaring bankruptcy could be challenging. You have several alternatives to consider, such as:
- Applying for a debt consolidation loan or refinancing your mortgage. However, these options come with their set of challenges, such as high-interest rates and administrative fees.
- Filing a Consumer Proposal, which allows you to propose how you’ll repay your unsecured debt. This gives you some time to pay in the equity over multiple years or find refinancing options in the future.
- Selling your house. Although a difficult decision, it could be a sensible option depending on your circumstances.
The Role of the Canada Revenue Agency (CRA)
The CRA has the authority to place a lien on your property if you have unpaid personal income tax. If such a lien exists when you declare bankruptcy, the tax debt is akin to a second mortgage, and bankruptcy will not eliminate it.
However, if the CRA threatens to place a lien on your property and you have substantial personal income tax debt, you should promptly consult a Licensed Insolvency Trustee (LIT). By filing a Consumer Proposal or declaring bankruptcy, you can prevent the CRA from placing a lien on your property, thereby safeguarding your home.
Property Taxes and Bankruptcy
City or municipal property taxes are different from income tax debt. If you file for bankruptcy, your property taxes will remain unchanged. They stay attached to the house and need to be paid when the property is sold.
Wrapping Up
The question, “What happens to my house if I declare bankruptcy?” does not have a one-size-fits-all answer. Many factors, such as the amount of equity in your home and your personal circumstances, can influence the outcome.
Before making any decision involving your home, it’s crucial to gather all relevant information and consult professionals. A free, confidential initial consultation with a LIT can provide you with the necessary insights.
