Your House Or Your Debt, Or Both?

Category: Bankruptcy Q&A (4) comments

Question: My husband owes about $12,000 in outstanding income tax debts after having to close our business. We had to live on credit card debt for a while and we owe another $40,000 in credit card debt. I work now and my husband is looking for work.  We own a home and believe we have about $25,000 in equity. What should we do? Is personal bankruptcy our only choice?

Eliminating Debt By Choosing Priorities

Declaring bankruptcy is not your only option. Deciding how to proceed is often about choosing your priorities.  Is it paying off Canada Revenue Agency, or your credit cards, or keeping your home?

keep house in bankruptcyIf you are willing to sell your home, the obvious answer is to find a place to rent, sell your home, and then use the proceeds of the sale to deal with your debt.  If your husband is looking for work and cash is tight, selling the house will reduce your debt and perhaps lower your monthly living expenses.

If keeping your home is a priority, and if you can afford to make the mortgage payments and other costs, your goal will be to deal with the debt while keeping your home.  You have the following options:

  1. You could attempt to borrow against the equity in your home.  If you could get a second mortgage, or a secured line of credit, for $20,000, you could pay off CRA and pay down your credit cards.  That may be wishful thinking, since if your husband isn’t working it will be more difficult to qualify for a debt consolidation loan. In addition, banks generally will only lend against a portion of your home equity, so a second mortgage will not be enough to deal with both your CRA and credit card debt.
  2. You could attempt to negotiate payment arrangements with Revenue Canada and the credit card companies.  For example, you could offer to pay CRA $500 per month until the debt is paid.  In general, CRA will only grant payment terms over a year, so it may take $1,000 per month or more for them to agree, which may not be possible on your current family income. And again, this does not deal with your credit card debt.
  3. A consumer proposal may be an option to negotiate an affordable repayment plan while keeping your home.  In order to get Revenue Canada and the credit card companies to accept your proposal you must offer them more than they would expect to get in a bankruptcy.  If they would expect to get $25,000 from your house in a bankruptcy, your proposal would need to be more than $25,000.  For example, you could offer a proposal of $30,000 so they will consider the proposal.  It may be a good deal for you as well, since you end up paying less than the full amount owing, with no further interest.

As you can see in this decision making process, your objectives with the house are an important consideration.  Selling your house eliminates most of your debt.  If you keep the house, you can file a consumer proposal, but you will have monthly payments to make during your proposal.

This is a complicated decision and every situation is unique. If you own a home but are struggling with debt, consult a licensed bankruptcy trustee for a no charge initial consultation to review your options in detail so that you can make an informed decision.

Leave A Comment

  1. Karen

    Can I stay in a home that has no equity in it the home because of job loss and business loss is in repair and there is more money owing on the home than what it is worth if I left there would be an even greater debt then staying. The mortgage is cheaper than rent so staying is a better option if we left the home we would be much worse off as we have no money to move, no jobs and moving to a new area.

    1. J. Douglas Hoyes

      Hi Karen. Yes, if your house has no equity, the trustee will not take your house if you go bankrupt. If your mortgage is up to date and you keep making your payments, the mortgage company will not take your house, even if you are bankrupt.

      Since the mortgage payment is cheaper than rent, it may make sense for you to keep the house.

      However, you should also consider the future: When you sell the house, will you lose money? You say that there is more owing on the house than what it is worth, so if you wait until the bankruptcy is over and sell the house and lose money, you are liable for the shortfall. That’s why you could consider surrendering the house now and including the shortfall in your bankruptcy, and then finding a place to rent. The monthly rent may be higher than what you are paying in mortgage payments, but when you include property taxes and home maintenance costs the difference may not be significant.

      This is a topic you should discuss in detail with your bankruptcy trustee before you make the decision to file bankruptcy.

  2. Gail

    I separated from my common law partner four months ago and filed for bankruptcy two months ago. He stayed in the primary family home and I moved back to our condo. Both our names are on both properties. I thought I could get the condo back in my name but the bank says I’d have to requalify on my own if I did and that I can’t qualify a single I claimed bankruptcy. Neither one of us can qualify. If it is sold there is not enough equity in the condo to cover the mortgage, real estate fees and a line of credit that is secured against the condo. Is it too late to include it in the bankruptcy. I don’t understand this process very well and when I ask my trustee question I get the feeling I am bothering her. Is it possible to change trustees once the process is started.

    1. Ted Michalos

      It is not possible for you to “change trustees” – your creditors have a mechanism to make a change, but bankrupts do not. Sorry – this comes up once or twice a year, but not often enough that the government thinks the laws need to be changed. To others reading this post, that is one of the reasons it is important to be careful when selecting a licenced insolvency trustee – look for review and testimonials on line, make sure you are comfortable with who you are dealing with as you can’t make a change later.

      In regards to the condo, if you have continued to make payments on the condo since you filed then the mortgage company may argue that it survives the bankruptcy. Since you only filed two months ago you may be able to still include it, but it will mean moving out and surrendering the condo to the mortgage company.

      Try your trustee again – if necessary put your questions in writing and if your trustee doesn’t respond contact the Office of the Superintendent of Bankruptcy and ask them for help.


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