Here’s a debt scenario that presents a challenge – what do you do if you have equity in your home but are behind on mortgage payments, owe other money, are getting collection calls and need protection? Should you file bankruptcy or are there other options?
How to deal with debts in this situation is going to depend on the answers to three questions:
- How far behind are you? One month can be caught up, four months means the house is likely going to be taken – but there are no absolutes, and could be options for either situation.
- Do you want to stay or have you decided you can’t afford to stay and need to let it go? If you are going to let the house go, consult with a trustee first to ensure you know how this works.
- How much equity is there? A small amount may not really be any, and a large amount could open up other options, such as a proposal or refinancing, or both!
Filing bankruptcy protects you in many ways from the actions of an unsecured creditor, like a credit card. But, it does not protect you from a mortgage bank (secured creditor) if you are behind on the payments. If they wish to enforce ‘power of sale’ and take the house, they can. So, if you are a little behind, you will need to bring your mortgage arrears current. Neither a bankruptcy, nor a consumer proposal, will deal with your mortgage arrears.
However, if you are quite a bit behind, you may have to seriously consider letting the house go. If you cannot afford to keep up with your mortgage payments in the long term, even after eliminating all your other debts through bankruptcy, then selling your home may be your best option. If there is a shortfall, this debt will be included in your bankruptcy allowing you to completely walk away from your mortgage. If there is any equity above any provincial limits, then any equity will be paid into your bankruptcy for the benefit of your creditors.
In the last scenario, we assumed you don’t want to keep your house. But what if you do and it’s other debts that are the real reason you can’t keep up with your mortgage. In other words, you are paying so much against your credit cards, payday loans and other unsecured debts each month that you don’t have enough left over to cover the mortgage. If, by eliminating those debts, you could afford to keep your home then you have two options:
- consider filing bankruptcy. If you do, any equity value in your home above any provincial exemption amounts, will have to be paid into your bankruptcy. That means coming up with the money from a friend or family member, or being forced to sell your home anyway.
- another way to keep you home if it has equity is to file a consumer proposal. This is essentially a payment plan with your unsecured creditors which will see you pay out the equity value in your home to your unsecured creditors over a period of up to five years. You may also have to pay an additional amount if you have significant income or other assets, but the main point is you can keep these assets if you file a consumer proposal.
Figuring out the answer to the three questions I outlined earlier can be difficult. It means taking a hard look at your budget, your debts and your overall financial situation. Book a free consultation with a licensed insolvency trustee in your community to get professional debt advice about your particular circumstances.
This article was contributed by Joel Sandwith, Licensed Insolvency Trustee with Hoyes, Michalos & Associates Inc.