Bankruptcy & Homes

The equity in your home is an asset that creditors in a bankruptcy will want to share in.

In a bankruptcy the equity in your home is determined by taking the current value of the home minus certain costs and the amount owed on the mortgage.

For example, if your home is valued at $500,000 and your mortgage is $400,000, you have $100,000 in equity that must be considered in a bankruptcy application. However, there are certain costs that can be deducted to significantly reduce the amount of this equity.

The formula is (Value of Home) minus (costs) minus (Value of Outstanding Debt on Home) = Equity

When a bankruptcy is filed all non-exempt assets are included in the bankruptcy.  Your home’s equity must also be included.

Where a bankrupt has more than $10,000 in equity in the home, the amount of equity will be considered an asset.

Where there is equity the bankrupt can either surrender the home to the trustees or pay the amount of the equity into the bankruptcy and keep the home.

For example, where the Trustee  has determined that after deducting costs and mortgages that the equity in a bankrupt’s home is valued at $20,000, the bankrupt can either pay $20,000 into the bankruptcy or surrender the home to the trustee.

Where there is no equity in the home, the home will not be considered an asset when you file for bankruptcy.

In order to keep your home in a bankruptcy you will need to continue to pay your mortgage payments.

Your home mortgage is called a secured debt, meaning the money owed on the debt is secured by the value of your home.  If you don’t pay the mortgage eventually the bank will seize your home for payment.

Where your mortgage payments are being made, even if you’re insolvent, the bank will not foreclose on the home.

Filing for bankruptcy may make it easier to manage your mortgage payments as you will be relieved of all other unsecured debt.

Where there is equity in the home and your considering bankruptcy you may want to consider a consumer proposal.

In a consumer proposal homes are not considered a seizable asset unlike in a bankruptcy.

Consumer proposals take your total unsecured debt versus your ability to pay.  A trustee then negotiates with your creditors to pay them a fraction of the amount owed.

The savings can be dramatic, up to 70% or more, and you do not lose or risk your home as you would in bankruptcy.