mortgage foreclosure

My Mortgage Is in Foreclosure – Now What?

Your financial institution has sent you a letter stating that they are taking legal action to foreclose on your home. What should you expect?

Foreclosures occur when homeowners are unable to pay back the lender of their mortgage, whether it be a financial institution, bank, or credit union. The institution who you defaulted with takes steps to gain control of the property in order to sell their collateral and recover their loan.

If you are worried about foreclosure, rest assured that you are not alone. Each year many Canadians find themselves in this stressful situation. Thankfully, there is some good news.

Foreclosure is not an immediate process, and in some cases, there may be alternative options available to homeowners to prevent foreclosure. Learning about the foreclosure process may help you better navigate the situation and reduce your financial and personal stress.

Mortgage Foreclosure Misconceptions

1. The lender will start foreclosing on your home after a single missed payment.

This is one of the biggest misconceptions about mortgage foreclosure. In reality, most financial institutions will wait until you have accumulated 3 months of missed mortgage payments before they take legal action. The reason behind this is because the foreclosure process is not just a hassle for you, but also for the financial institution. Therefore, they will try and avoid the foreclosure process unless absolutely necessary.

If you end up missing one month payment, lenders may sometimes be willing to compromise and suggest an alternative payment plan to help you (and them) to avoid the expensive and time consuming legal foreclosure process which congests the court system. As a result, it is important to stay in touch with your financial institution and advise them of your intentions in order to help prevent the foreclosure process from proceeding.

2. You will lose your home immediately.

Before they can take action, they are first required to schedule a court date to initiate a judicial foreclosure. This usually begins with the court issuing a “Redemption Order”. Specifically, if you have equity in your home, the court will allow you time to sell it.

The time you’re allotted to sell your home can vary in length and is called the “Redemption Period”. The redemption period is often set at 6 months. This will benefit you, because if you are able to come up with the necessary payment to bring your mortgage up to date, and your lender agrees, you may be able to stop the foreclosure process. Alternatively, it provides you with the time to list your home for sale and control the sale process.

3. The bank will auction off the house at an unrealistic low price.

If you have made it his far in the foreclosure process and have been unable to sell your house or bring your mortgage up to date, the bank must approach the court again to gain control of the listing agreement. However, this does not mean you need to pack up your belongings immediately. The financial institution must justify the sale price of your listing to the court, which usually causes a delay. At this stage you should be ready to leave as soon as the “sold” sign goes up.

If the foreclosure process reaches the point where the lender is in control of the listing and has accepted an offer that the court has approved and that offer is less than what is owing on the mortgage and related foreclosure costs, the resulting sale will result in a shortfall. In other words, the lender has not recovered all of their mortgage funds. This is a problem for you because the lender will be able to pursue you for collection on that shortfall.

The Personal Property Security Act of BC’s “seize or sue” provision does not apply to a real estate transaction. Therefore, you can expect to get collection action from your lender for recovery on the shortfall.

Sometimes people think they have insurance on this possibility of a shortfall but the insurance is not for you. For example, if your mortgage was insured by Canada Mortgage and Housing Corporation (CMHC) or Genworth, those companies will pay the lender for the shortfall on the mortgage foreclosure. They will then turn right around and look to recover that shortfall from you. We have seen this take a long time to unfold even to the point that years after the foreclosure started CMHC or Genworth may come calling for their money. This delay likely occurs if the property is difficult to sell.

Consider Your Options

If you expect that the foreclosure process on your home will result in a sale price that is less than your mortgage balance you need to consider a fresh set of options:

1. Wait and see what happens. This is a good option if you believe the home will sell at or near market value.

  • If there is a small positive balance left over after the payout of the mortgage and related foreclosure costs the surplus funds will be paid into court and you can apply to court to recover them.
  • If there is a shortfall, but it is just a small shortfall, you may be able to pay it back like you would any small debt. If you have other small debts then a debt consolidation loan from your bank may be a practical option to find debt relief.

2. Make a Consumer Proposal or file for bankruptcy. These federally regulated options provide powerful relief from debt problems and are an effective way for dealing with a mortgage shortfall. Sometimes we hear from people that they felt they had to wait until the foreclosure was completed before proceeding but that is not the case. There is no need to wait if you know the shortfall will be large.

In order to make a Consumer Proposal or file for bankruptcy in Canada you must contact a Licensed Insolvency Trustee (LIT). Most trustee offices in Canada, including our office, provide for a free initial consultation. We would encourage you to take advantage of that as everyone’s situation is slightly different and the above comments provide a general overall perspective on the foreclosure process.

Contact a Licensed Insolvency Trustee

While you may be feeling a lot of anxiety right now, take action and find out your options. In our twenty plus years of experience, we have seen that when people find out there is a pathway out of their debt problems the stress in their lives starts to dissipate immediately. Go ahead and schedule that first appointment, it’s free!

Derek L. Chase, CPA, CA, LIT

Being able to offer debt help assistance to individuals and corporations on a more intimate basis was a driving force in completing a “second CPA” by becoming licensed by the Federal Government as a Licensed Insolvency Trustee (previously Trustee in Bankruptcy) in 1997. It is extremely satisfying to be able to witness lives change for the positive due to a restructuring of financial affairs.