Bankruptcy and your house: 5 common questions answered
When you’re financially stressed, your whole world can feel uncertain. Financial setbacks can cause stress and anxiety that can worsen if you aren’t sure how your financial problems will impact what’s important to you, like your home.
If you’re considering filing for bankruptcy and you have questions about how bankruptcy will impact your house, here’s what you need to know.
Yes. However, you must first be considered insolvent to be eligible to file for bankruptcy. Being insolvent simply means your debt is greater than what you owe, or you cannot continue to make your debt payments. During your initial meeting with a Licensed Insolvency Trustee (LIT), he or she will review all areas of your finances, such as your debt, your total income and your assets (including your house). If you are insolvent, your LIT will explain two legal options for debt forgiveness, consumer proposal, bankruptcy, and what impact each solution will have on your financial situation.
The amount of equity you have in your home will play an important part in deciding whether you can keep your house when you file bankruptcy. To determine the equity in your house, you need to know the current market value of your house, your mortgage amount and what you owe in property taxes. Here’s what the calculation looks like:
Your equity = market value of your house - amount owing on your mortgage - unpaid property taxes
Let’s look at an example. Using the above calculation, 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 (or $350,000 minus $310,000 minus $2,500).
If you have a relatively small amount of equity in your home, and your outstanding debts are significantly more than you would pay off with your home equity, you might be able to keep your house, if you can continue to make payments to your mortgage lender. To keep your home in a bankruptcy, you must pay an LIT the amount of equity you have in your house, minus any provincial exemptions. There are exemptions that allow you to keep some of the equity in your home when you file for bankruptcy. Since each province has its own list of what assets are exempt or protected during bankruptcy, it’s best to speak to an LIT about your situation.
The amount of equity you have in your house represents the amount of money you could receive if you sell. This is money you would have to repay your debts. In a bankruptcy proceeding, if you have a large amount of equity in your home and you can’t afford to pay your LIT the non-exempt equity, you may have to surrender your home. In this case, if you want to proceed with declaring bankruptcy, your LIT will arrange the sale of your house and the proceeds will be given to your creditors.
Since filing for bankruptcy eliminates most, if not all, of your unsecured debts (like credit cards, payday loans and lines of credit), you may find it easier to meet the financial obligations of paying your mortgage, property taxes and utilities. During the bankruptcy process, you’ll attend two credit counselling sessions, during which your LIT will discuss strategies for budgeting, credit and debt management and rebuilding your credit during and after going bankrupt.
There are alternatives to bankruptcy that don’t affect your house
During your initial meeting, an LIT will explore multiple debt relief options to find the right solution for your unique circumstances. Bankruptcy is only considered once all other debt solutions are ruled out. A consumer proposal is a formal debt relief option that allows you to keep your assets, including your house, and can substantially reduce the amount of unsecured debt you owe. To learn more about consumer proposals, check out our blog post, 10 things you need to know about consumer proposals.
The thought of filing for bankruptcy can feel overwhelming and scary, but everyone’s situation is unique. If you’re falling behind on your debt payments and you’re afraid of losing your home, a Licensed Insolvency Trustee can help you decide whether bankruptcy is the right solution for your situation.
If you’re worried about how bankruptcy will affect your home, meet with a Licensed Insolvency Trustee today to determine what debt relief options and exemptions are available to you.