Keep Your House, Lose Your Debt

Do not assume that bankruptcy or other debt solutions will cause you to lose your home.  The decision to seek help for dealing with your debt issues is not easy.  Many times individuals are fearful that bankruptcy and other debt options will cause them to lose everything. Losing your home is one of the most common fears that people have when they are considering bankruptcy. 

House has No Equity

One of the first things a trustee will do is determine the value of your home and the amounts owing to any mortgage companies or lien holders. With this information the trustee can then determine if there would be any equity in the property available for your unsecured creditors. 

If your house has no equity, then the trustee would have no interest in your home and would release their interest in your property. When this happens, it is between you and your mortgage holder to decide whether or not you can keep your house. In general, if you are up to date on your mortgage payments and property tax and if proper insurance is in place, you would be able to stay in your home.

House has Equity

What happens if the trustee determines that there is equity available in the house? There are a lot of different factors that are considered in this case. The trustee will look at the amount of the equity in comparison to your debt level and also considering your income and cost of living. 

Here is  an example. If you have equity of $7,500.00 in your property and you have room in your budget to make a reasonable monthly payment, then the trustee can arrange for you to make monthly payments until the amount of $7,500.00 is paid in full to your bankruptcy estate. This means that in addition to keeping up your monthly mortgage payments you would have to make extra payments to the trustee for the equity in the house. This way the creditors get the equity but you would get to keep your home.

Consider Other Alternatives

Now let’s say the equity is $20,000.00 and you have the ability to make a large monthly payment each month but can’t keep up with the required payments to service your debt. When this happens, the trustee will often look at alternatives to bankruptcy - including a consumer proposal. A consumer proposal is a great way to allow individuals to keep their assets and settle on their debt by making a monthly payment that fits your budget. So long as your creditors will get more money from the consumer proposal payments a bankruptcy can often be avoided. This alternative is often considered for those individuals that have large house equity.

Sometimes it’s Best to Walk Away

The most difficult thing to recommend to people, is that they walk away from their home however, sometimes it is what is best. Trustees will make this recommendation when they see that the household budget cannot afford to live in the house even when the debt has been eliminated through a bankruptcy. Another time when this is recommended would be when the house has been mortgaged two or three times and the value of the property is far less than the balance owing to the mortgage holders. Finally, it is sometimes recommended that people that have a lot of equity but have limited income each month, sell their property to help pay down their debt through a bankruptcy or consumer proposal. But note that these are recommendations and this decision is made before you file your bankruptcy papers, so you would be fully aware of what will happen before filing.

Deal with your Debt

Depending on which province you live in there are different rules about how the equity in your home is treated in bankruptcy, as some provinces do make a portion of the equity exempt from the trustee’s interest. One thing that is consistent, is that the trustee will rarely seize your house and force it to be sold. Trustees will also take the time to explain all of the options available to you regarding your house to ensure you are able to  make a decision with a clear understanding of what will happen. Don’t let the fear of losing your house prevent you from dealing with your debt issues.