Why the Bank Doesn’t Take Your House or Car Away, If You File Bankruptcy or Do a Proposal

The answer is in Section 84.2(1) of the Bankruptcy & Insolvency Act which states:

84.2(1) Certain Rights Limited – No person may terminate or amend or claim an accelerated payment or forfeiture of the term under any agreement, including a security agreement, with a bankrupt individual by reason only of the individual’s bankruptcy or insolvency.

So what does this mean for a person filing for bankruptcy or doing a proposal?

This means that a person (which includes a corporation) cannot terminate an agreement, including a security agreement like a car loan or a mortgage, just because the debtor became insolvent (insolvent means owes more than they have), or because the debtor filed bankruptcy or did a proposal. Accordingly, this provision of the Bankruptcy & Insolvency Act prevents a lender, like a mortgage company, from calling in its mortgage and therefore protects the debtor who filed for bankruptcy or did a proposal from losing their house or their car etc. This provision holds true provided the debtor maintains their payments and complies with other terms of the agreement, for example, keeping insurance coverage up to date etc. However, consideration must be given to the equity in the home, as that equity will vest (pass) to the trustee, in a bankruptcy scenario, as an asset available to creditors and will need to be factored into the terms of a proposal.