February 8, 2021
Declaring bankruptcy doesn’t automatically mean losing your house. Discover how declaring bankruptcy affects home ownership and how you can keep your house here.
Filing for bankruptcy can feel overwhelming. Many people hesitate to take this step because they fear losing their most valuable asset—their home. The truth is that losing your home is far from guaranteed, and many who declare bankruptcy get to keep it.
For homeowners with significant debt, bankruptcy can offer a fresh start, but it’s essential to understand how it impacts your property. There’s a variety of factors that affect your ability to keep your home when you file for bankruptcy.
Having equity in a house means that the value of the property you own outright (your home's market value) exceeds the amount of any outstanding loans or mortgages you have on the property. In other words, it is the difference between the market value of your home and the amount you owe on it. This equity represents your ownership stake in the property.
You can file for bankruptcy if you have equity in your home.
To be eligible, you must be insolvent, meaning your debts exceed your assets or you're unable to meet your debt obligations as they come due.
A Licensed Insolvency Trustee (LIT) will assess your financial situation, including debts, income, and assets like your house.
If you're deemed insolvent, the LIT will discuss debt relief options such as a consumer proposal or bankruptcy, detailing how each would affect your finances.
It's important to note that each province in Canada has its own rules regarding home equity exemptions during bankruptcy proceedings. Depending on where you live, a portion of your home's equity may be protected, but any equity exceeding the exemption may need to be realized for creditors.
The items and exemptions that apply upon filing for bankruptcy vary depending on the province or territory where you live.
Learn about bankruptcy exemptionsThe equity in your home plays a significant role in determining whether you can keep your house when filing for bankruptcy. Again, equity is the portion of your home's value that you own outright, and calculating it accurately is essential to understanding how your home might be affected. Here's how to determine your equity:
Your equity = market value of your house - amount owing on your mortgage - unpaid property taxes (or any other secured debts on the property)
For example, if the market value of your house is $350,000, your outstanding mortgage is $310,000, and you owe $2,500 in property taxes, your equity is $37,500 ($350,000 - $310,000 - $2,500).
if the value of your home exceeds the allowed limit set by your province for home equity in a bankruptcy, the Licensed Insolvency Trustee may need to sell the portion of the home's equity that exceeds this limit and use the proceeds to pay off your creditors.
However, if your equity falls below the exemption limit for your province or territory, you may be able to keep your home, provided you continue making mortgage payments and stay current on property taxes. Your LIT will work with you to assess your situation and explain your options based on the specific rules in your province.
As we’ve just seen, the amount of equity in your home greatly affects your ability to keep your home. If your equity is relatively small and your debts significantly exceed the equity in your home, it’s possible to retain your property while resolving your other financial obligations.
To keep your house, you’ll need to pay your Licensed Insolvency Trustee the amount of equity in your home that exceeds your province’s exemption limit.
If your equity falls within your province’s exemption and you can continue paying your mortgage and property taxes, you’re more likely to keep your home. If your equity exceeds the exemption, the LIT may work with you to arrange a payment plan to cover the excess rather than forcing the sale of your home.
It’s essential to consult with your LIT to fully understand how your home equity and provincial laws apply to your specific situation.
If you have a significant amount of equity that exceeds your province’s exemption limit and you’re unable to pay your Licensed Insolvency Trustee (LIT) the value of the non-exempt equity, you may need to surrender your house. In this situation, your LIT would arrange for the sale of your home, and the proceeds would go toward paying your creditors.
For example, if your house has $50,000 in equity and your province allows a $10,000 exemption, you will need to pay the LIT the remaining $40,000. If you cannot do so, the house may be sold.
It’s important to note that some alternatives, such as a consumer proposal, will allow you to keep your home even if you have significant equity. We’ll discuss consumer proposals and how they can let you keep your home more below.
Discussing your financial situation with an LIT will help you explore all options and fully understand the implications for your house and equity.
Filing for bankruptcy clears most, if not all, of your unsecured debts, such as credit cards, payday loans, and lines of credit. With these debts eliminated, you may find it easier to manage your essential financial obligations, including your mortgage payments.
To help you regain control of your finances, the bankruptcy process includes two mandatory credit counselling sessions. During these sessions, your Licensed Insolvency Trustee will work with you to create a realistic budget, manage your remaining debt, and plan strategies for rebuilding your credit.
It’s important to note that bankruptcy does not eliminate secured debts like your mortgage. You must continue to make regular payments to your mortgage lender to avoid foreclosure. If your budget is tight, your Trustee can provide guidance on adjusting your expenses to prioritize your mortgage and other essentials.
There is an alternative to bankruptcy that don’t affect your house.
Bankruptcy, while a commonly known word, is rarely used. Many more people file consumer proposals in Canada. In the third quarter of 2024, for example, there were 34,588 insolvency cases filed by consumers. 27,341 (79%) of those were settled by filing a consumer proposal, only 7,247 (21%) required bankruptcy proceedings.
A consumer proposal is an alternative to bankruptcy that allows you to become debt-free without losing any assets. This means you won’t be at risk of losing your house if you file one.
A consumer proposal reduces the amount you need to pay back. The amount that is reduced can be as much as 80%. It also freezes interest payments and is created to suit your unique situation. A consumer proposal can last up to five years.
A consumer proposal provides debt relief without the severe consequences of bankruptcy. In fact, as we said bankruptcy is generally reserved for only the most extreme financial situations where no other options are viable.
If you’re worried about losing your house but need a way to reduce your debt, a consumer proposal might be the right solution.
Speaking with a Licensed Insolvency Trustee (LIT) is the best way to explore your options and find a solution tailored to your unique financial situation. LITs are Canada’s only federally regulated debt professionals, and they’re ethically bound to act in your best interest.
At BDO, our LITs take a judgment-free approach to helping you become debt-free.
Our process starts with a free, confidential consultation where we review your financial situation in detail.
You deserve a fresh start and the peace of mind that comes with knowing you’re making the best choice for your future. Contact us today to take the first step towards becoming debt-free.
February 8, 2021
Declaring bankruptcy doesn’t automatically mean losing your house. Discover how declaring bankruptcy affects home ownership and how you can keep your house here.
