When faced with financial difficulty, it’s natural to worry about what you might lose if things get serious. If you get so deep into debt that you have to file for bankruptcy or a consumer proposal, how would your lifestyle change? For most people, their greatest fear is losing the roof over their heads.
I’m happy to inform you working with a bankruptcy trustee does not mean you have to lose your home. About one-quarter of all people who file bankruptcy or a consumer proposal have a home when they file, and in most cases they keep their home. Today I’ll explain why and how this can work.
The Equity Factor
If you file for bankruptcy, your trustee will take into account how much equity you have in your house before deciding how to proceed. Equity is the value of a homeowner’s interest in their property, i.e. the amount of money you would make if you sold the house. For instance, let’s imagine you owe $250,000 on your home, and an appraiser estimates that the home is worth about $260,000. After real estate commissions, selling costs and outstanding property taxes, there would be nothing left over after selling the house—which means you’d have no equity in your home. That means that, as long as you keep up with your mortgage payments, you can continue to live in your home and build equity for the future.
But what if you do have equity in your home? Of those who file bankruptcy with our firm and own a home, we find that the average insolvent homeowner has about 10% equity in their home. In that case, depending on the province you are in, you may lose that equity if you file bankruptcy. However, you still have options that can help you hang on to your house.
Say, for instance, you would make a total of $8,000 from the sale of your home. Does that mean you have to sell it? No, your first option could be to pay your trustee $8,000 into your bankruptcy in lieu of selling your home, and these funds would then be distributed among your creditors. If you don’t have that money up front (which is unlikely) or can’t borrow it from a family member or friend, you may want to consider a consumer proposal instead. A consumer proposal is a formal debt settlement option through the Bankruptcy & Insolvency Act that will allow you to spread out those payments over a maximum of five years. Again, this is dependent on your ability to continue to make your current mortgage payments. If you do not, your lender can still foreclose on your home.
When the Mortgage Payments Become Too Much
Hopefully, we’ve eased your fears about losing your house to some degree. However, you may want to consider the option of willingly giving up your current home. If you’re struggling to make your mortgage payments and fielding calls from angry creditors, it could be that your house is a big part of your problem.
A red flag is if your housing costs take up more than 35% of your income. Commonly called “house poor,” this situation often means you’re struggling to balance your housing costs with other needs and wants.
Perhaps you didn’t originally take on more house than you could afford, but a life change (divorce, job switch, birth of a child, relocation) has led to a change in your finances. You may also find yourself suddenly burdened by unexpected repairs, like the need to fix an old roof or leaky basement. Whatever the reasons, you’ve found yourself with a mortgage you can’t afford. So what are your options?
- Move to a house that you can afford. Selling your house and purchasing something with a lower monthly payment or even renting a house can lower your monthly expenses and help you get back on track financially.
- Increase your earnings. Whether that means looking for a new job, getting a second job, or even taking in a roommate or tenant, increasing your income will help to make your payments more manageable.
- If you owe more on your home than it is worth you can hand the keys to your home over to your lender and include any shortfall in your bankruptcy or consumer proposal.
Whatever you decide, the sooner you recognize that you’re in financial trouble, the sooner you can start dealing with the problem. Not sure which option is right for you? Talk to a trustee for advice. They can help you run the numbers and figure out your next move.
Doug Hoyes has extensive experience resolving financial issues for Canadian citizens. A Licensed Bankruptcy Trustee and co-founder of Hoyes, Michalos & Associates, he is also a Chartered Professional Accountant (CPA), Chartered Insolvency and Restructuring Professional and Business Valuator. He regularly comments on a variety of TV, radio and other media outlets on topics surrounding bankruptcy and writes a column for the Huffington Post. Hoyes has been a Licensed Trustee since 1995 and testified before the Canadian Senate’s Banking, Trade and Commerce Committee in 2008.
Flickr: Daniel Hall