Debt Relief Experts
Many homeowners struggling with debt worry about what happens to their mortgage if they decide to file for bankruptcy. Will you lose your home? Can you catch up on missed mortgage payments? This article explains how bankruptcy in Canada treats a mortgage, how a Licensed Insolvency Trustee (LIT) calculates your home equity, and what options – like a consumer proposal – may be available if you’re carrying a mortgage alongside other debts.
Table of Contents
How Bankruptcy Treats a Mortgage
A mortgage is a secured debt, which means your home serves as collateral. In bankruptcy, secured debts are handled differently than unsecured debts such as credit card debt or personal loans. Because your mortgage is secured, it is not automatically discharged in bankruptcy.
Does bankruptcy mean you lose your home?
Not necessarily. Keeping your home depends on several factors:
- Whether you stay current on mortgage payments.
- How much equity you have in the property.
You can generally keep your home in a bankruptcy as long as your mortgage is current. If you’ve fallen behind on your mortgage payments, bankruptcy does not automatically stop a foreclosure. You’d need to arrange repayment terms with your lender or consider other options, such as a consumer proposal, to deal with your unsecured debts and free up funds for mortgage payments.
Determining Home Equity
A key step in determining whether you can keep your home is calculating your equity. Your LIT will:
- Estimate the current market value of your home.
- Subtract any outstanding mortgage balance(s), plus any other secured liens (e.g., a secured line of credit, overdue property taxes, or unpaid condo fees).
The result is your home equity. Each province has different rules on how much of that equity is protected (called your “exemption”). For example in Ontario, if you home equity is less than $10,000 your home is exempt from seizure. In Alberta, the first $40,000 in your principal residence is exempt. Always check provincial exemption limits or talk to an LIT for details where you live.
- If your equity is below the provincial exemption, it’s usually easier to keep your home because there is no large equity at stake for the LIT to realize.
- If your equity is above the exemption, that value is considered an asset in your bankruptcy.
What If There’s Equity?
If you do have equity in your home above the exemption, your LIT is required to account for it in the bankruptcy process. This may involve:
- Buying back the equity: You (or someone on your behalf, such as a spouse) can pay the amount of the equity to your trustee over the length of your bankruptcy to keep the home.
- Filing a consumer proposal: If you have significant equity and want to avoid selling your property, a consumer proposal lets you repay a portion of your debts over up to five years. This option often helps you protect home equity more effectively than a bankruptcy.
It’s important to note that if you’re behind on your mortgage or facing foreclosure, bankruptcy alone does not force the lender to stop legal action. You still need to make a plan for mortgage arrears, either by catching up payments or considering an alternative arrangement.
What If You Have Negative Equity?
If your house is worth less than the total amount you owe on your mortgage(s) and any other secured loans, you have what’s known as “negative equity.” A mortgage shortfall can happen after a drop in real estate values or if you’ve refinanced multiple times and increased the total debt on your home. In this situation, you may decide to:
- Keep paying the mortgage if you believe the market will recover or you prefer to stay in the home long-term.
- Surrender the property if staying no longer makes financial sense. If you walk away from your home and the lender sells the house, any shortfall (the difference between the sale price and what you owe) becomes an unsecured debt. Unsecured debts are generally covered in a bankruptcy.
Ultimately, deciding whether to keep or surrender a home with negative equity depends on your financial goals and overall financial situation. Conversations with a Licensed Insolvency Trustee can help you decide on the best way to proceed given your personal circumstances.
Should You File for Bankruptcy if Your Mortgage Is at Risk?
If you’re behind on mortgage payments, bankruptcy does not wipe out mortgage arrears because a mortgage is secured. However, dealing with your unsecured debts through bankruptcy or a consumer proposal may free up enough cash flow to help you catch up on your mortgage.
Before foreclosure proceedings begin, it’s wise to talk to an LIT about your debt relief options. Early action often means fewer legal costs and more time to work on a repayment plan or explore alternatives that fit your budget.
Other FAQs
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Can I refinance my mortgage after filing for bankruptcy?
Yes, most lenders focus on whether you’ve been keeping up current payments. If you continue making on-time mortgage payments, many lenders will renew or refinance when the term ends. Your mortgage lender cannot cancel your mortgage just because your filed bankruptcy.
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Can I get a mortgage after bankruptcy?
Yes. Bankruptcy shows on your credit report, which may make it harder to qualify for a new mortgage right away. However, with many of your old debts cleared, you can focus on saving a bigger down payment while you rebuild your credit.
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Can I file bankruptcy on just my mortgage?
You cannot pick and choose which debts go into a bankruptcy. A mortgage is secured, so it generally remains unaffected unless you choose to surrender the home.
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What happens to a second mortgage or secured line of credit in bankruptcy?
These debts are also secured against the house. They must be factored into your home equity calculation. If they exceed your property’s value, the second lender might have little recourse, but you still need to consider these obligations when deciding how to handle your mortgage and home.
Take the Next Step: Talk to a Licensed Insolvency Trustee
Personal bankruptcy in Canada handles your mortgage differently from unsecured debts, so understanding your home equity is crucial. If you have significant equity, a consumer proposal may offer a way to protect your home while managing debts. If you owe more than the house is worth, you may decide whether keeping the property is the right move based on your overall financial goals.
Talking to a Licensed Insolvency Trustee is the best way to clarify your options. Whether you’re worried about keeping your home or looking for ways to deal with mounting debt, contact us for a free, no-obligation consultation so we can help you make the right decision about filing bankruptcy with a mortgage.
