Bankruptcy is often a bittersweet thing. Yes, it’s a last resort that no one wants to find themselves in. But it’s also a chance to start anew, make better decisions this time around, and clear out a lot of your debt that you otherwise simply would never have been able to pay off. But as most people know, bankruptcy won’t erase all of your debt; and there’s likely going to be at least one that you’ll still be stuck with at the end of it all. So, is your mortgage one of them?
Mortgages and bankruptcy are complicated things – especially when they collide with each other.
The question of mortgages and bankruptcy all come down to equity – the total amount of your home that you actually own.
If you have negative equity where you actually owe more than the home is worth, it will become an unsecured debt and therefore eligible to be discharged upon bankruptcy. However, lenders aren’t always so keen on doing this. If you can still make the mortgage payments, even though you’ve declared bankruptcy, most lenders would rather have you continue to do so rather than go through the timely and expensive process of foreclosure. The same is true if you have no equity in the home.
This is an important part of the process. Many people automatically think that because they’re going into bankruptcy, they won’t be able to pay for a home. But consider how much more money you’ll have available if you can stop worrying about that credit card or other form of unsecured debt. The money that’s currently going to this can instead go to your mortgage and you’ll be able to keep your home – even if you’ve gone bankrupt.
If you have positive equity, meaning there is currently a portion of your home that you do actually own, that equity will become an asset to be included in your bankruptcy estate. In this case, the bankruptcy trustee will most likely seize the asset and sell it in order to help pay off your debts.
If you stop making payments on your mortgage at any time, whether you’ve declared bankruptcy or not, the lender can foreclose on the mortgage. This means that the lender can seize the home, evict you from it, and resell the property. If you’re not making your payments, for whatever reason, this is going to happen and you will lose the home, along with the mortgage.
It’s important to remember than when talking about bankruptcy and your mortgage in Canada, that each province is different and they all have their own bankruptcy exemptions. It’s for this reason that when you’re considering bankruptcy you speak to a licensed mortgage broker and a licensed bankruptcy trustee. Both of these professionals will be able to outline your rights and responsibilities for you, and help you come up with a way to keep your home.
