YOUR HOUSE IN BANKRUPTCY
It is normal to have a strong emotional attachment to your home – it’s a very personal space where you feel safe and secure. Experiencing financial problems and worrying about whether you will be able to keep your house if you file for bankruptcy adds emotional stress that can be overwhelming. It may be reassuring to know, then, that you do not automatically lose your house when you file for bankruptcy. The key factors considered include:
- The amount of equity you have in your house
- Your cash flow and ability to manage your house-related payments (mortgage, tax, utilities, etc.)
How home equity is handled in a bankruptcy filing
Your equity is the difference between what your house is worth on the market and what you still owe on it. In order to keep your house when filing bankruptcy, you need to be able to pay out all of your home equity to the trustee. To estimate the equity you have in your home, use the following formula:
(Current market value of your home) -
(Unpaid property taxes + Other liens or charges)
Example: Based on recent sales of similar homes in his neighbourhood, Bob estimates his Newmarket, Ontario home would sell for $150,000. The trustee may require confirmation of the value as part of the bankruptcy process. Bob’s remaining mortgage is $130,000 and he has $600 outstanding on his property taxes. Below is the calculation of the estimate equity Bob has in his home:
|Current market value of Bob's home||$150 000|
|Remaining mortgage amount||$130 000|
|Property tax arrears||$600|
|Total liens||$130 600|
|Bob's estimate home equity*||$19 400|
In Bob’s case, to file for bankruptcy, he would have to pay the trustee $19,400 before his bankruptcy was complete in order to keep his house in Newmarket. If he did not have any equity or negative equity (where mortgage balance is greater than the value of the home), he could still keep his house due to the bankruptcy exemptions outlined for Ontario. At the same time, it is important for Bob to ensure that he can afford to maintain his home without jeopardizing his financial future.
Too much home equity to file for bankruptcy?
Paying out the equity in your home may or may not be possible or desirable if you have paid down a significant amount of your mortgage and/or the value of your home has increased significantly. There is another option.
Example: Based on recent sales of similar Newmarket, Ontario homes in his neighbourhood, John estimates his home would sell for $200,000. His remaining mortgage is $100,000 and he owes $1,000 in unpaid property taxes, but has kept his utility payments up to date. Below is the calculation of the estimate equity John has in his home:
|Current market value of John's home||$200 000|
|Remaining mortgage amount||$100 000|
|Property tax arrears||$1 000|
|Total liens||$101 000|
|Bob's estimate home equity*||$99 000|
In John’s case, if he filed for bankruptcy, he would have to pay the trustee $99,000 before his bankruptcy was complete in order to keep his house in Newmarket. For many people like John with too much home equity, this simply is not feasible.
If you find you have accumulated more equity than you can pay, there are other options that allow you to keep your home, such as filing a consumer proposal. Talk to a BDO Newmarket trustee about the benefits of filing a consumer proposal instead of filing for bankruptcy.
*For illustrative purposes only