How Does House Equity in Bankruptcy Work: What Can You Do?

If you are a homeowner considering bankruptcy in Canada, you are probably wondering, “What is going to happen to my home?”.

It is a valid concern—your home is not just an asset; it is where your life happens. Well, the good news is that filing for bankruptcy does not automatically mean you will lose your home. In fact, many people can protect their home equity and even stay in their homes.

Let’s break down how home equity bankruptcy works, what exemptions can help, and how you can explore alternatives to protect your property and finances.

What Happens to Home Equity in Bankruptcy?

If you have decided to file for bankruptcy, after weighing the pros and cons, your home becomes part of your bankruptcy estate. This means the trustee looks at your home as an asset that could help repay your creditors.
 
But do not panic… This does not mean the trustee will sell your home automatically!

Here is how it works:

• If your home equity—the difference between your home’s value and what you owe on your mortgage—is low or negative, the trustee may leave your home out of the bankruptcy process.
• If you have significant equity, you may need to pay that value to the trustee to keep your home.

Understanding how home equity bankruptcy is handled in Canada can help you get a clearer picture of what to expect and how your home might be affected.

Bankruptcy Exemptions for Home Equity

One of the most important tools for protecting your home during bankruptcy is a bankruptcy exemption. This allows you to protect a portion of your home equity, helping you hold on to your property.

Federal vs. Provincial Exemptions for Home Equity

In Canada, exemptions vary by province. For example:

• In Ontario, homeowners can protect up to $10,000 in home equity.
• In British Columbia, the exemption is $12,000 for urban homes and $9,000 for rural ones.

If your home equity falls below the limit in your province, you are in a good position to keep your home.

What is a Homestead Exemption?

Now, in all of your research, you may have also heard the term “homestead exemption”.
 
Think of this as your home’s protective shield during bankruptcy. It makes sure that part of your home’s value is safe and off-limits to creditors. How much you can protect depends on the rules in your province, which can be tricky to navigate.

That is why we recommend speaking with a Licensed Insolvency Trustee to help you figure out how this applies to your situation.

What Factors Affect Home Equity in Bankruptcy?

A few key factors decide what happens to your home equity during bankruptcy and understanding them can help you make smarter choices.

The Role of a Home Appraisal

A home appraisal gives you a snapshot of your home’s market value. This number is crucial because it determines how much equity you have. If the appraisal comes in high, then you might have more equity to deal with. But if the value is on the lower side, it could make protecting your home easier during the bankruptcy process.

How Your Mortgage Balance Affects Equity

Your mortgage balance is a big piece of the puzzle. If you still owe a lot on your mortgage, your equity might be small—or even non-existent—which means your home is less likely to be impacted. On the flip side, if your mortgage is nearly paid off, you will have more equity, and that might mean negotiating with the trustee to keep your home.

Can You Keep Your Home After Bankruptcy?

One of the biggest questions people ask is, “Can I keep my home if I file for bankruptcy?” The good news is, in many cases, the answer is yes.

How Do You Keep Your Home in Bankruptcy?

Keeping your home often depends on your equity:

• If your home equity is within the exemption limit for your province, you are more likely to keep your home.
• Even if your equity exceeds the limit, you may still be able to negotiate a repayment plan with the trustee or explore alternatives like a consumer proposal.

What Is a Consumer Proposal, and Can It Help?

If you are unsure whether bankruptcy is the right option, it is worth considering how to qualify for a consumer proposal. It is a great way to manage your debts while keeping your home safe.

A consumer proposal is a formal, legal agreement with your creditors that lets you repay a portion of your debts over time. Unlike bankruptcy, it allows you to keep your assets, including your home, and protects your equity.

Why Choose a Consumer Proposal?

Here are why many homeowners prefer a consumer proposal over bankruptcy:

• You get to keep your home: A consumer proposal ensures your home will not be sold to pay off debts.
• It is easier on your credit: Consumer proposals only affect your credit report for three years after you finish payments, compared to seven years with bankruptcy.
• You avoid equity surprises: If your home’s value increases during the process, you will not lose the additional equity.

A consumer proposal is especially helpful in hot real estate markets, where rising home values could make bankruptcy more complicated. But, if you are unsure about the differences, a Licensed Insolvency Trustee can guide you through the decision.

Steps to Protect Your Home Equity

If holding onto your home is your top priority, there are steps you can take to protect your equity during home equity bankruptcy proceedings.

Maximize Your Exemptions

Bankruptcy exemptions are there to help, so make sure you are taking full advantage of them. These rules can protect part of your equity, and working with a trustee can help you maximize what you can keep.

Talk to a Trustee

Navigating bankruptcy on your own can feel overwhelming. Speaking with a Licensed Insolvency Trustee can help you understand your options, whether it is bankruptcy or a consumer proposal. They will also explain how much bankruptcy might affect your credit score, which is helpful when weighing your options.

How Farber Can Help

Dealing with home equity bankruptcy or a consumer proposal can feel overwhelming, but you do not have to do it alone.

At Farber, our team of debt experts are here to help you understand your options, help you potentially protect your home, and help you make the best decisions for your financial future. Whether you are trying to figure out how bankruptcies work in Canada or want to know if a consumer proposal is right for you, we are here to guide you.

Ready to take the next step? Book a free consultation with us today and let’s figure out the best way forward.