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Lose My House In Bankruptcy

Will I Lose My House If I File For Bankruptcy?

When you’re overwhelmed by debt and on the brink of Bankruptcy, you might be wondering about your house. Losing your home for any reason is a real fear and can be devastating. Your home represents stability, safety and a place to escape the outside world. It can also be an investment you are using to build wealth.

In this post, we’ll look at whether or not you’ll lose your house if you file for Bankruptcy and alternatives to filing for Bankruptcy that allow you to keep your home.

Filing for Bankruptcy and Your Home

Bankruptcy laws are complicated. If you want to file for Bankruptcy, you must have a Licensed Insolvency Trustee (LIT) file for Bankruptcy on your behalf. Your LIT will explain what assets you can and cannot keep and help you navigate the process.

Each province has its own rules regarding Bankruptcy exemptions. Many provinces allow you to keep your home if your home’s equity is below a specific amount. However, having more equity than the allowable amount means your LIT can seize your house and use the equity to pay your creditors.

Will I lose my house in Bankruptcy?

The answer to “Will I lose my house in Bankruptcy?” is – it depends. Whether you can keep your house or not depends on how much equity you have in your home. You can keep your home in Ontario if your equity is less than $10,783.

Generally, you’d have to have more than $10,783 left after you pay the selling costs and pay off the mortgage on your home. So, your Licensed Insolvency Trustee or execution creditor has to prove that your equity will be more than that if you sell your home. If they can’t, you should be able to keep your home.

Suppose your home is worth $700,000, but you owe $680,000 on your mortgage. Once you pay your closing costs, pay off your mortgage and any penalties on your mortgage, it’s unlikely you’ll have more than $10,783 left. In this case, your home should be exempt from your Bankruptcy.

What happens if your home is worth $700,000 and you owe $600,000? In this case, you’ll have more than $10,783 left if you sell your home and pay all the expenses related to the sale. In this scenario, if you file for Bankruptcy you will be required to sell your house. The equity from your home foreclosure will be used to pay your creditors.

Joint home equity in Ontario

One important thing to know about your home equity is how it’s divided. If you are filing for Bankruptcy, but your spouse is not, your home equity is not exempt. If you have $20,000 equity in your home, for example, the equity considered when you declare Bankruptcy is the net equity.

Net equity means that even if each of you only has $10,000 equity after you divide it, for Bankruptcy purposes, there is $20,000 equity in your home. This amount is above the maximum equity threshold in Ontario. As a result, you can be forced to sell your home, and creditors will take half of the equity, which is yours. The remaining half will go to your spouse.

Bankruptcy Alternatives

If you need debt relief but don’t want to risk losing your home, there are alternatives to consider. The best one for you will depend on your circumstances. Other options are:

  • A consolidation loan.
  • Refinancing your mortgage.
  • A debt settlement.
  • A debt management program.
  • A Consumer Proposal.

Consolidation loan

If your debt hasn’t affected your credit rating, you can apply for a consolidation loan at your bank or credit union. A consolidation loan is a loan you use to pay off unsecured debt like credit cards and lines of credit. You’ll have one payment at an interest rate usually lower than your credit card rates. A consolidation loan can help streamline your payments and make your debt easier to manage.

Refinancing your mortgage

As a homeowner, refinancing your mortgage is another option if you have enough equity in your home and your mortgage payments are up to date. A mortgage refinance can roll all your debt into your mortgage or a Home Equity Line of Credit (HELOC). A HELOC is a line of credit secured by the equity in your home.

Doing this will eliminate multiple payments and usually reduce your interest rate significantly. To qualify for a mortgage refinance or HELOC, you typically must have a good credit rating, enough income to support mortgage or HELOC payments, and sufficient home equity.

Debt settlement

You might be able to negotiate a debt settlement with your creditors. You can contact creditors to offer a lump sum payment to eliminate your debt. The settlement amount will be less than you owe, and if your creditors accept your offer, it will eliminate your debt. Three things to be aware of with a debt settlement are:

  • You need the cash available to make the lump sum payment.
  • Your creditors can reject your offer, so you’ll need a different solution to deal with your debt.
  • A debt settlement will negatively affect your credit rating.

Debt management program

Credit counselling agencies offer debt management programs. A debt management program combines all your unsecured debt into one payment, usually with a reduced interest rate. Sometimes, the interest rate is negotiated down to zero.

You make one payment to the agency, and they distribute the money to your creditors. Debtors often finish their debt management program within three years, but some take five years to complete. As with a debt settlement, your credit rating will take a hit.

Consumer Proposal

A Consumer Proposal can be a great alternative to Bankruptcy, especially if you don’t want to lose your house filing for Bankruptcy. If you file a Consumer Proposal, you can keep your assets, including your house and car, as long as you make your payments as agreed.

Your LIT will work with you to develop a Consumer Proposal that can reduce the amount you owe by up to 80%. If your creditors accept your Consumer Proposal, you’ll forward payments to your LIT, who will use the money to pay your creditors.

It can cost more and take longer to complete a Consumer Proposal than to complete a Bankruptcy. However, the advantages of a Consumer Proposal over a Bankruptcy are that you can keep your assets, including your house. Also, while a Consumer Proposal hurts your credit rating, it is less damaging than filing for Bankruptcy.

How to Keep Your House When You Have Too Much Debt

Keeping your home will be difficult if you fall behind on your mortgage payments. Your payments must be made on time and your property taxes kept current. Your mortgage payments might be much easier if you eliminate your other debt. There are other debt relief options to consider that won’t affect your home.

Fortunately, help is available to assist you. At Adamson and Associates Licensed Insolvency Trustees, our Licensed Insolvency Trustees will work with you to find the best solution to your debt. You’ll get expert advice to help you achieve the best possible outcome for your financial situation. Call us today at 519-310-5646 for a free consultation to protect your home from creditors while getting rid of your debt.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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