Can you declare bankruptcy and keep your house?Ginsberg Gingras
Keeping their house is one of the biggest concerns of people who end up declaring bankruptcy. It’s one of the first questions I’m asked during consultations.
“If I go bankrupt, will I lose my house?”
The answer: it depends!
Depends on what? On the equity available.
If there is equity, the house could become part of seized property. If there is no equity, individuals who can make their mortgage payments, may be able to keep their house.
Equity is the difference between the value of the house and the balance of the mortgage. For example, on a house valued at $200,000 with a mortgage balance of $150,000, the equity is $50,000.
$200,000 – $150,000 = $50,000
You must know two variables to determine the equity on your house:
- The balance owing on your mortgage
- The value of your house
You can determine your mortgage balance by accessing your account on your financial institution’s transactional website. Or you can obtain this information by calling your lender.
To determine the value of your house, you will have to contract the services of an appraiser. This professional will make a reliable and impartial assessment of your home.
If you meet with a Licensed Insolvency Trustee (LIT) to find a solution to your debt, they will deduct brokerage fees from the equity, about 7% of the total.
$200,000 – $150,000 – $14,000 = $36,000
(Selling price – Balance owing on mortgage – Brokerage fees = Equity)
When is the house liable for seizure?
Determining whether the house has equity is not enough to decide whether it will be liable for seizure.
In Ontario, the Execution Act rules clearly on the issue. Under subsections 2(2) and 2(3), any principal residence with equity $10,000 or less may not be seized. Conversely, a person declaring bankruptcy cannot keep their house if the equity exceeds $10,000.
In Quebec, the law is not as specific. Each situation must be analyzed individually.
It is up to the LIT to make a decision. They must determine whether selling the house will result in a profit for the benefit of creditors.
The LIT must therefore anticipate the costs associated with selling the house, such as
- Mortgage payments;
- Brokerage fees;
- Hydro costs;
- Other maintenance costs (e.g. snow plowing);
Having made the calculations, the LIT will seize the house if they deem there are profits to be made by selling it. Otherwise, the owner can keep the house, as long as they continue to make payments.
How to keep your house when it is liable for seizure
A house that is liable for seizure is not seized automatically. In this situation, there are ways to avoid reaching that point.
1- Pay the equity
To keep their house, a bankrupt person always has the option of repaying the value of the equity to the LIT.
A family member may be able to lend the money required to make the payment.
2- The spouse pays the Licensed Insolvency Trustee
If the spouse is not affected by the bankruptcy, they may be able to buy back the part of the house conferred to the LIT.
The topic of the impact of a bankruptcy on a spouse is complex. It has already been covered in a blog entry, titled, Bankruptcy and the Impact of Joint Debts on Your Spouse.
For more information on this subject, I recommend you contact us at 1-855-442-2433.
3- Make a payment agreement
Under certain conditions, it may be possible to make a payment agreement with the LIT to repay the value of the equity.
The amount owed can be repaid over a few months.
4- File a consumer proposal
An insolvent person who wishes to keep their house may also file a consumer proposal. This option is much more popular than repaying equity to the LIT.
The consumer proposal is an alternative to bankruptcy. Its main advantage is that it excludes all property seizure. Therefore, the house, car, cottage, investments, and other assets remain the property of the debtor.
This is how I would summarize the difference between bankruptcy and a consumer proposal, in a sentence:
Bankruptcy wants your wealth; consumer proposals want your health.
If there is equity in their house, a person filing a consumer proposal must offer their creditors a higher amount than this equity. Otherwise, they will not accept the proposal.
Take for example, a bankruptcy that would net $12,000 to creditors, including the profit from the sale of the house. The debtor can file a consumer proposal instead and offer their creditors a sum of $16,000. This amount may be repaid over a period of up to 60 months ($266.67 per month).
Since they would receive a higher amount than they would from bankruptcy, the creditors would be inclined to accept this proposal. It’s also a good solution for the insolvent person, because they retain their house, and the monthly payments are not too high.
As you can see, there are solutions for insolvent people who wish to keep their house. Even in bankruptcy, your Licensed Insolvency Trustee can generally suggest multiple options.
For more information, or to contact us and receive a free evaluation, fill out our consultation form.