Bankruptcy is a legal process that can help individuals who are unable to pay their debts find some relief. However, one common concern that lingers in the minds of many people considering this route is, “What happens to my house if I file bankruptcy?” This article aims to provide in-depth insights into this complex issue.
Understanding Bankruptcy
Before we delve into the specifics of how bankruptcy can affect your house, it is crucial to understand what bankruptcy is and its implications.
Bankruptcy is a legal status that can be initiated by an individual or a company when they are unable to repay their debts. It is a process that involves the evaluation of the debtor’s assets by a bankruptcy trustee, who then uses these assets to repay the debts to creditors. Despite the stigma associated with bankruptcy, it can often provide a fresh start for individuals burdened by overwhelming debt.
Your House and Bankruptcy: The Basic Scenario
So, what happens to your house if you file bankruptcy? The short answer is, “it depends”. The fate of your home in a bankruptcy largely depends on the amount of equity in your house and the bankruptcy exemptions that apply in your particular case.
Equity and Your House
Equity is the difference between the market value of your home and the amount you owe on it. If the amount you owe on your house is more than its market value, you have ‘negative equity’. On the other hand, if your house is worth more than what you owe, you have ‘positive equity’.
Bankruptcy Exemptions
Bankruptcy laws provide for ‘exemptions‘ that allow you to keep a certain amount of property in a bankruptcy. These exemptions vary from province to province in Canada. For instance, in Ontario, homeowners can keep up to $10,000 in home equity when they file for bankruptcy.
Does Bankruptcy Mean You Will Lose Your House?
The prospect of losing a home can be daunting. However, declaring bankruptcy does not automatically mean you will lose your house. If you have up-to-date mortgage payments, filing for bankruptcy does not mean you will automatically lose your home. In fact, bankruptcy can actually help you save your home by eliminating other debts that are making it difficult to keep up with your mortgage payments.
Bankruptcy and Keeping Your House
If the equity in your house does not exceed the exemption limit, you can keep your home as long as you continue making mortgage payments. For instance, in Ontario, if the equity in your home doesn’t exceed $10,000, you can maintain your home if you keep up with mortgage payments.
However, if the equity in your home is more than the exemption limit, you will need to pay the bankruptcy trustee the amount of equity above the exemption limit. This is often referred to as ‘buying back’ your equity.
Consumer Proposal: An Alternative to Bankruptcy
If you have significant equity in your home and cannot afford to ‘buy back’ your equity, you may want to consider filing a consumer proposal. A consumer proposal allows you to keep your assets while you pay back a portion of your debts over a period of time. Your payments are spread out over a longer period, typically up to five years, which can make this option more manageable for many people.
Selling Your Home
In some cases, selling your home may be the best option. If you are behind on your mortgage payments and cannot afford your house even after filing bankruptcy, you may choose to sell your home. The proceeds from the sale can then be used to pay off your debts.
Discussing Bankruptcy Alternatives
It’s natural to worry about your home when considering bankruptcy. However, it’s essential to remember that there are alternatives available. A Licensed Insolvency Trustee can provide valuable advice and guide you through the process.
Conclusion
The question, “What happens to my house if I file bankruptcy?” does not have a one-size-fits-all answer. The impact of bankruptcy on your home depends on various factors, including the amount of equity in your home and the bankruptcy exemptions that apply to your case. It’s crucial to seek advice from a professional to understand your options and make an informed decision.
Remember, bankruptcy is not the end of the world. It’s a legal tool designed to help individuals and businesses find relief from overwhelming debt. With the right guidance and careful planning, you can navigate through this challenging period and embark on a path towards financial recovery.
