Will I Lose My Home If I File A Bankruptcy?

Here are some reasons why, based on our experience (note: there are no legal opinions here):

RENTERS

If you rent, it’s highly unlikely there would be any impact to your home if you file a bankruptcy as long as you’ve been keeping your rent payments up to date. The home is not considered an asset of yours so the bankruptcy trustee will have no interest in it. Your landlord likely won’t know you’ve filed a bankruptcy and even if they find out, it’s unlikely to impact an existing lease agreement that’s in good standing. In fact, the Bankruptcy and Insolvency Act specifically states that any term in a lease agreement that says that making an insolvency filing is a default of the agreement, is unenforceable.

If you’re behind on rent, you would be required to list your landlord as a creditor and they may or may not receive payment of some or all of the arrears from the bankruptcy, depending on what is available. This history of non-payment and inability of the landlord to pursue you for the unpaid portion (outside participating as a creditor in your bankruptcy) can sometimes cause the relationship with the landlord to deteriorate beyond repair such that you feel you have to move even if they can’t evict you.

If you’re looking to rent a new home after filing a bankruptcy, you may find that your bankruptcy filing (which will show up when they run a credit check) is a deterrent for some landlords. Therefore, you may have fewer options and/or less negotiating power when it comes to the amount of rent you will have to pay. That said, you may be successful in arguing that your bankruptcy actually means you’re more likely to keep up with rent payments, as you no longer have to juggle debt payments in your budget.

OWNERS

If you own your home, it is an asset the bankruptcy Trustee will have to address. However, that may not mean that you lose your home. Here are some reasons for this:

If you have no equity, there is no asset to seize

Bankruptcy does not deal with secured debt such as a mortgage. Although you may own the home, if you're in default on the mortgage the bank generally always has the right to sell it to get paid back through a foreclosure action, even if you’ve filed a bankruptcy. However, let's assume the payments have been made and the mortgage is in good standing...

People who file bankruptcy are less likely to have any equity (value left over if you sold it and re-paid the mortgage) in their home. Whether this is because they could only afford a high-ratio mortgage, they had to accept high interest rates due to bad credit, they’ve taken out a second mortgage to deal with their debt, or a combination of these factors, they essentially don’t “own” anything even though legally they're the homeowner. If the home has no equity, there's no asset for the Trustee to liquidate, so it's usually left to the individual and the mortgage holder to figure out whether the payments can be maintained to keep the mortgage in good standing so they can stay in the home. In this situation, typically, if you can keep making the payments, you can keep the home.

Your equity is exempt from the bankruptcy

Each province in Canada has laws that make certain assets exempt from seizure by creditors, which means that the people owed money can’t take those assets or force an individual to sell them in order to get paid. The Trustee in a bankruptcy is subject to those same laws.

The reason for these exemptions is to allow the individual to keep enough to live on while they rebuild their financial lives. Without these exemptions, it would be much harder for bankrupt individuals to rebuild, and they would be more likely to need to rely on social assistance programs in the aftermath of a bankruptcy filing.

In Alberta, the Civil Enforcement Act and its Regulations govern exempt assets, and currently the regulations state that up to $40,000 in equity in a primary residence is exempt. If the equity in your home doesn’t exceed this, your home is likely off-limits to the Trustee.

You can make a deal with the Trustee to keep it

 If there’s non-exempt equity in your home but it’s important to you to keep it, you can attempt to negotiate with the Trustee to keep it, by offering to pay the Trustee for its value. Often, this involves assistance from family, payments to the Trustee over time, and/or obtaining a second mortgage to "extract" the equity. In this case, you’re essentially paying for the equity that you already built up all over again so that you won’t have to relinquish the home to the Trustee.

Let’s use an example, assuming you’re the sole owner of the home and it is your primary residence:

If you would get $400,000 in sale proceeds (after sale costs) in the event of a sale, and your mortgage balance is $350,000, you have $50,000 of equity in your home.

If you live in Alberta, $40,000 of that equity would be exempt. So the amount of equity “available” to your creditors (or the Trustee in the case of a bankruptcy) would be $10,000.

The bankruptcy Trustee would have to somehow collect that $10,000 for distribution to creditors. As discussed above, selling the home is not their only option for doing this. They can negotiate with you to pay that value to keep the house.

There is one major caveat when considering the equity in the home: If the Trustee determines at the time you file the bankruptcy that there is no “asset” to pursue or makes an agreement with you to let you pay the non-exempt equity to keep the home, there is some risk that they will change their mind if the value of the home increases during your bankruptcy. If you “acquire” equity (or more equity) after the date of filing, some courts have ruled that the Trustee has a responsibility to re-evaluate and pursue the increased equity up until the date you’re discharged from bankruptcy.  This risk alone can sometimes cause people who are very insistent on keeping their home to decide to file a Consumer Proposal instead of a bankruptcy, as the amount of the equity (or lack thereof) is typically set at the time the proposal is filed.

Too many people delay coming to see a Licensed Insolvency Trustee to talk about their debt due to fear over losing their home. As a result, they often end up spending months, years or even decades struggling with their debt before they reach out for help. As you can see, the impact a bankrutcy has on your home depends on your situation, so if you’re not sure whether you should consider bankruptcy, contact a Licensed Insolvency Trustee for a consultation. When you do so, the Licensed Insolvency Trustee can also talk to you about other options that may work better for you.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals review their options for dealing with overwhelming debt, and where appropriate we support them through an insolvency filing and help them get set up for future success. If you'd like some advice, please reach out to us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.