What Happens to My Mortgage Debt After Filing Bankruptcy?

What Happens to My Mortgage Debt After Filing Bankruptcy?

Mortgage Debt & Personal Bankruptcy? An In-depth Look

Financial distress is a common predicament many homeowners face, and filing for bankruptcy often appears as the only viable option. But what happens to your mortgage debt after filing bankruptcy? The answer to this question largely depends on whether you decide to keep your house or not. This decision is influenced by your ability to maintain monthly payments and your desire to retain ownership of the property. Let’s dissect these two scenarios separately.

Maintaining Ownership of Your Home

Deciding to Keep Your House

Many individuals harbor a strong emotional attachment to their homes. It’s not just a structure made of bricks and mortar but a haven that houses family memories and dreams. If you’re one of those who wish to retain your house, here are two crucial conditions you need to fulfill:

 

  • Pay the equity in your house to the trustee
  • Ensure timely mortgage payments

 

The equity in your house is deemed an asset of your bankrupt estate. Therefore, the trustee must realize this asset. However, this doesn’t necessarily mean you have to sell your home. You can repay the equity by making larger payments to your trustee during your bankruptcy tenure. If these payments seem too steep, you have the option to consider a consumer proposal which lets you distribute these payments over an extended period.

In many instances, homeowners who file bankruptcy do not have any equity in their home. In such cases, the solution to retaining the house is simpler. You’re required to keep your mortgage payments updated. Failure to do so invites the mortgage company to seize your house.

Post-bankruptcy filing, as long as your payments are regular, the mortgage company is not allowed to modify any terms in the mortgage agreement.

Filing bankruptcy might lighten the financial burden of other debts, freeing up some budget to keep up with your mortgage. Regarding renewal, if your mortgage payment history is commendable, the mortgage company generally offers a straightforward renewal of the mortgage when it’s due. However, while in bankruptcy, shopping around with other mortgage companies might be challenging, limiting your ability to negotiate a lower rate until your bankruptcy is completed and your credit re-established.

Forfeiting Your Home

For some, a house becomes a financial burden too heavy to bear. Even after bankruptcy takes care of other debts, they find it difficult to afford the mortgage and associated house expenses. In such scenarios, they can choose to hand over the house back to the mortgage company. Any deficit from the sale of the house becomes an unsecured debt that is dischargeable in bankruptcy. This deficit is the outstanding amount with the mortgage company after the house sale, payment of property taxes, utilities, lawyers, real estate commission, and maintenance costs.

Mortgage debt may not directly be affected by bankruptcy, but filing bankruptcy can present an opportunity to reassess your housing costs and make a long-term decision. If you need assistance in making this decision, consult a local Ontario bankruptcy trustee.

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