House Equity in Bankruptcy: Protecting Your Home

It may be surprising to hear that many bankrupt people own their homes. The house becomes an asset of their bankruptcy estate for the creditors. In some cases, the trustee has no interest in selling the house because the equity is minimal or even zero ($0) after taking the mortgage payout and estimated selling costs into account.  If the equity is zero ($0), the trustee may release the house back to the bankrupt person. Even if there is equity, the trustee may settle with the bankrupt person directly and allow them to keep the house by paying the value of the equity to the trustee. It is common for people to purchase a variety of assets back from their trustee, including equity in a home.

There was a time when the value of bankruptcy assets was determined at the date the person filed for bankruptcy. However, due to a recent court decision, this is no longer the case. In Lepage (Re), 2016 ONCA 403, the Ontario Court of Appeal held that the trustee must determine the value of the asset on the date that the person is discharged from their bankruptcy, not just the date that they filed for bankruptcy. The Court went on to say that, if the value of the asset increases during the bankruptcy, then the appreciation in value (the increase) is an asset for the creditors and the trustee must collect it for the creditors. This is a significant legal judgement because, depending on the circumstances, it can take years for a person to be discharged from their bankruptcy, and their assets may appreciate (increase in value) over that time. A settlement made with the trustee at the date of bankruptcy may not be valid if the value of the asset increases afterward.

For example, in many current Ontario bankruptcies, home equity has risen to values that are greater than the amount of the debt. This is due to the surge in Ontario real estate values over the past few years. Consequently, many people who thought that they had settled their equity issues with their trustee are suddenly required to pay their debts in full to prevent the trustee from selling their house to comply with the Lepage decision.

The bottom line? Most people want to keep their home. Therefore, anyone faced with this situation of having to pay their debts in full in their bankruptcy are logically choosing to file a consumer proposal instead and are seeking mortgage refinancing to fund the consumer proposal. A consumer proposal may be filed by a bankrupt person before they are discharged, and if the consumer proposal is accepted and approved, at which point the bankruptcy will be annulled.

Many people in debt are of the opinion that, if they must pay their debts in full in a bankruptcy, then a consumer proposal is a better alternative because it is less damaging to their credit report over time and may result in less fees and costs. A bankruptcy would remain on their credit report for seven (7) years after discharge from bankruptcy; while a consumer proposal will remain on their credit report for only three (3) years after the proposal is fully performed (completed).

Going forward, people with houses who cannot afford to pay their debts may be more hesitant to file for bankruptcy even if the current equity is zero ($0) for the simple reason that they do not know what the house equity increase could be when they are eventually discharged, especially in a rocketing real estate market like the one we have in Ontario right now. Many of these people in debt are instead considering other options, including the option of filing a consumer proposal, where the process will not involve potential equity amount increases over time.

If you are struggling with consumer debt or tax debt, please talk with one of our Licensed Insolvency Trustees by clicking on the FREE CONSULTATION button, below, or giving us a call.   We will help you explore your options. Time is money… especially in a dramatically rising real estate market and we are here to help.