Mortgage Debt in Bankruptcy
Mortgage debt in bankruptcy is treated differently than other debts in Canadian bankruptcies.
The reason for this is that a mortgage is a debt secured by an asset.
Secured debts, such as your mortgage loan or car payments, are not discharged in a Canadian bankruptcy or consumer proposal.
However, secured debts in bankruptcy can be a complicated area of the bankruptcy law.
How Do Secured Debts Impact a Canadian Bankruptcy?
Three important factors regarding secured debts and bankruptcy in Ontario are:
How Much Equity Exists in Your House?
The amount of equity in your property will have a major impact on your bankruptcy. Equity is the excess amount over what the value is worth and what you owe on it. For example, if your home is worth $200,000 and your mortgage balance and all other liens is $185,000 you have $15,000 of equity in your property. In some cases the asset will be worth less than what you owe, in which case you have negative equity. If the equity in your home is more than the bankruptcy exemptions in Ontario allows you will have to surrender your home to the Trustee or "buy back" the difference between what the exemptions allow and your actual equity.
Do You Want to Keep Your Home?
What Happens to Secured Debts in Bankruptcy?
Debtors with negative equity in their home can surrender their asset and turn the mortgage debt into an unsecured debt.
This means that the mortgage shortfall debt can be included in your bankruptcy.
The debt will be discharged at the end of your bankruptcy.
If you have equity that is above the limit of the homestead exemption value in Ontario ($40,000), the excess equity will become an asset for your bankruptcy estate.
In some cases, this means that your Trustee will sell your house and recoup the funds to distribute to your creditors.
However, if you would like to keep your home you could “purchase” the excess equity from your Trustee.
You will need to continue making your mortgage payments.
If you cannot afford to purchase the equity back from the bankruptcy estate you should consider a consumer proposal.
In a consumer proposal, your secured debts are not impacted making it a very popular bankruptcy alternative.
Equity can be a complicated matter so it is very important to speak with an experienced insolvency trustee, such as those partnered with Bankruptcy Ontario, to determine how the equity in your home should be calculated and how that equity will impact your bankruptcy file.
Are Your Mortgage / House Payments Up To Date?
If your payments on the mortgage are up to date and you can continue making the payments and have less equity than the bankruptcy exemptions allow you to keep, your motgagor will likely allow you to continue living in the home (if you would like to do so). If your mortgage payments are not up to date, your mortgage lender can foreclose on you even if you are bankrupt. If your other house payments, such as property taxes or municipal utilities, are not up to date your city or utility company can place on lien on your property. In this case, the unsecured debts will be converted to secured debt that will impact your bankruptcy case. When you file for bankruptcy you won't be paying on your unsecured debts which could make it easier to continue making your mortgage payments.
Learning More About Secured Mortgage Debt in Bankruptcy
To learn more about mortgage debt and other secured debts in bankruptcy please don’t hesitate to consult with a Licensed Insolvency Trustee from Bankruptcy Ontario.
When you schedule a no charge, risk free initial evaluation you will get all the answers to your questions, learn about bankruptcy and bankruptcy alternatives and get the peace of mind that you can take control of your financial situation.