What Happens to My House If I Declare Bankruptcy?
If you are having money troubles and find it difficult to pay your credit card debts, line of credit, car loans, AND mortgage you are not alone. Homeownership is expensive. Before you know it, the credit cards have been maxed out due to a renovation project or because of general maintenance and other living expenses. You may be wondering, what happens to my house if I declare bankruptcy?
The answer is not so simple and must be looked at closely. As with so many financial questions, the answer is “it depends”. What it depends upon is the amount of equity in the house. Equity is calculated by starting with the market value of your house and subtracting the mortgage balance. Let’s take a look at the following three scenarios: no equity, some equity, and lots of equity.
When housing markets drop, as they have done in the past in certain parts of BC, sometimes we see situations when the house value is equal to or less than the mortgage balance. In other words, there is no equity. In this situation, it is possible to keep your house when you file for bankruptcy so long as you continue with the mortgage payments. If you decide to not continue and your house goes into foreclosure, the bankruptcy will protect you from any shortfall.
This situation needs the most analysis as it depends upon how much equity is in the house. Federal Bankruptcy laws allow each province to set exemption levels for what assets a person can shield from creditors.
For example, in BC a principal residence exemption exists such that you can shield between $9,000 to $12,000 of equity depending on where you live. What this means is that you would have to have more than $9,000 of equity in your home per person before your unsecured creditors would have the right to any of the equity. Therefore, once again, you could keep your house. The same analysis exists if you are wondering whether you can keep a car that has a secure car loan.
When the equity grows beyond the exemption level, the amount that goes above must be paid into the bankruptcy proceeding. If this is still minimal, often people accomplish it by making monthly payments. Another option would be to seek refinancing or get some assistance from friends or family. Overall, the answer is that you can keep your house in this scenario so long as the nonexempt equity is made available to your unsecured creditors.
Lots of Equity
When there is lots of equity in your house it might be difficult to keep it and declare bankruptcy. There are several other alternatives to consider before filing for bankruptcy when you have substantial equity in your home.
- Apply for a debt consolidation loan or mortgage refinancing with your current lender. This may give you enough cash to pay off your unsecured creditors. It might be challenging to get approved for such a loan. In addition, be careful that the interest rates and administration fees that you will be charged are not too high.
- Use a Consumer Proposal to gain some breathing room. This powerful federal option will put a stay of proceedings in place and allow you to make an offer as to how you pay back all or a portion of your unsecured debt. A Consumer Proposal must be filed through a Licensed Insolvency Trustee (that’s us!). It provides for a repayment to your unsecured creditors that is slightly better than what they receive in a bankruptcy process. The advantage of this strategy is it gives you some time to either pay in the equity over multiple years or find some refinancing in the future.
- Sell your house. This can be a difficult choice but it is an option and one that needs to be looked at. Sometimes this can make sense if you are at a time in your life when you want to make a move.
Pro tip: if you are considering this, it is still advantageous to talk to a LIT ahead of time as you may lose a part of your sales proceeds if you still need to file for bankruptcy. If you sell your house before proceeding with bankruptcy then there is no principal residence exemption.
In this podcast, Licensed Insolvency Trustee, Derek Chase talks about refinancing your home to avoid debt problems.
What About the Canada Revenue Agency?
When you have personal income tax debt, one of the collection methods that the Canada Revenue Agency (CRA) has is to put a lien on your house. How does this play out if you file for bankruptcy? Once again it depends on timing. If CRA has put a lien on your house already, that tax debt is treated very much like a second mortgage and bankruptcy will not remove it. Once the house is sold, the mortgages must be paid out by the sales proceeds.
If you own a home and CRA is threatening to put a lien on your house, or you have substantial personal income tax debt, then you better hurry up and talk to a LIT. By filing a Consumer Proposal or a bankruptcy, you will prevent CRA from putting a lien on your house and its debt will fall into the unsecured category thereby protecting your house.
How About Property Taxes?
City or municipal property taxes are another tax that sometimes gets mixed up with income tax debt. Property taxes will not be affected if you file for personal bankruptcy. The property taxes stay attached to the house and will not be extinguished by bankruptcy. Eventually, the property taxes must be paid when the property is sold. When there is no pressure to sell, sometimes municipalities will proceed with a tax sale thereby forcing the property taxes to be paid.
As you can see, there is no hard and fast rule that answers the question – what happens to my house if I declare bankruptcy? In many cases, people have the opportunity to keep their house even in the context of obtaining bankruptcy protection.
One thing that we work hard to avoid is any surprises. Before you make any decision involving your house, it is important to get all the appropriate information and ask questions. Please take advantage of our free, confidential, initial consultation to explore how you can gain relief from your debts while staying in your home.