How Bankruptcy affects your Home

Whether it is your first home or your third, everyone has an emotional attachment to their home. So it may be of great relief to find out that just because you file for bankruptcy does not mean you will automatically lose your home. The determining factors are:

  1. The amount of equity you have in your home
  2. Whether you can maintain payments associated with your home (mortgage, taxes, utilities etc.)

Keeping Your Home

Home equity is the difference between the home’s worth on the market and the outstanding balance of all liens on the property (Mortgage, taxes etc.).

If there is no equity in your home all you need to do is maintain the associated payments. Your mortgage lender cannot foreclose on your property just because you filed for bankruptcy.

If your home does have equity than you will need to pay the equivalent amount to the trustee in Bankruptcy.

Example: Based on recent sales of similar homes in her neighbourhood, Sally estimates her Ontario home would sell for $350,000. (The trustee may require confirmation of the value as part of the bankruptcy process.) Sally’s remaining mortgage is $340,000 and she has $900 outstanding on her property taxes. Below is the calculation of the estimated equity that Sally has in her home:

​Current market value of Sally’s home ​$350,000
Less:​
Remaining mortgage amount​ ​$340,000
​Property tax arrears ​$900
​Total liens ​$340,900
​Sally’s estimated home equity* ​$9,100

 

In Sally’s case, to file for bankruptcy and keep her home, she would have to pay the trustee $9,100 before her bankruptcy was complete. If she did not have any equity or negative equity (where the mortgage balance is greater than the value of the home), she could still keep her house and continue to pay the secured creditor. However, It is important for Sally to ensure that she can afford to maintain her home without jeopardizing her financial future, before deciding to keep it.

What if I have too much equity in my home?

Let’s take a look at Sally’s situation again but this time it’s many, many years down the road and the remaining mortgage amount is much lower.

​Current market value of Sally’s home ​$350,000
Less:​
Remaining mortgage amount​ ​$140,000
​Property tax arrears ​$900
​Total liens ​$140,900
​Sally’s estimated home equity* ​$209,100

 

In this scenario, in order for Sally to file for bankruptcy and keep her home, she would need to pay the trustee in Bankruptcy $209,100.00 before her bankruptcy was complete.  For many people this is simply not feasible and in most cases a person cannot be classified as insolvent. In cases like these we often recommend looking into other debt relief options such as an informal proposal, debt settlement or credit counselling where you can still manage to repay on your debts and not have your home factor into your repayment on such debts.

*For illustrative purposes only. Further deductions to home equity such as mortgage penalties, may also need to be considered

 

 

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