Bankruptcy Aftermath: Can’t Pay for Bankruptcy

| Category: Bankruptcy in Ontario
Category: Bankruptcy in Ontario | Leave a comment

Question: My husband declared a second bankruptcy last year. The first one, over 15 years ago, was being young and stupid and there were no assets to deal with.

Now this time he decided to keep the house and car since there was no equity in either. The problem that we have is that there was a HUGE misunderstanding with the trustee in a number of areas. I truly believe she did not do her job.

The first on was that he understood that if we couldn’t keep up with the house payments afterwards we would be able to add it in. Call it dumb or naive but that is how we understood.

can't afford bankruptcySecond was about the surplus income in a bankruptcy. The amounts and percentages were not clearly stated and now we have racked up a HUGE bill that we can not pay.

We have asked what happens now and can’t get a clear answer.

We wish we would have gotten much better advise and thought she should have sat down with us to discuss our options and “what ifs” better. In hindsight we know that we clearly cannot afford our two mortgages along with all of our bills and the location of the house in comparison to my husbands great job. Gas has become a major factor.

So we have no idea where to go from here. We would like to hand in the keys and walk away from the mortgage but are afraid of wages being garnished. BUT we don’t see any other options. We have only been late twice and are up to date as of now but we have over $5000 due in surplus, all utilities are way overdue and will be cut off any day as well as approx. $10,000 in debt (including car) that we should have included.

We are in a terrible mess and the killer is that my husband has a good income! HELP!

Answer : You are correct that it does not appear that you fully understood your options.  In most cases your bankruptcy trustee will explain in detail what will happen to your house after you claim bankruptcy.  If you surrender the house prior to filing, you are not responsible for any shortfall.  In your case, since there was no equity and it does not appear that you can afford the payments, that was probably the best course of action.  Of course that’s easy to say in hindsight; at the time the trustee may have explained this to you, and you may have decided that without the pressure of the other debts, you could still afford it.  At this point the past doesn’t matter; it’s what can you do going forward that matters.

With respect to surplus income payments in a bankruptcy, again, you are correct; if your income is high, it can get very expensive.

In hindsight, in your husband’s case, the correct answer may have been to surrender the house back to the bank, and then file a consumer proposal.  (Without more information it’s impossible to know whether or not a consumer proposal was a viable alternative).

Again, what matters is what can you do going forward.

First, if you walk away from the house now, and the bank sells it, you will be responsible for the shortfall.  Since you have made mortgage payments since the bankruptcy started, you can’t now walk away from it without consequences.  You could do the following:

  1. ask the bank for a break on the mortgage; perhaps you can defer one or two payments to give you some breathing room
  2. you could list the house for sale; you will get more selling the house as an owner-occupied house than the bank will get in a power of sale.  There may still be a shortfall, but you can negotiate a repayment plan with the bank on that shortfall.
  3. you could just surrender the house; it may take the bank up to a year to seize it, sell it, and then pursue you for the money, but you are correct, if at that point you don’t pay, wage garnishment is a problem.
Second, to deal with the surplus income you owe: you should meet with your trustee and work out a payment plan.  Since this is your husband’s second bankruptcy and he has surplus income, he will be bankrupt for a minimum of 36 months.  That means he has 36 months to make all of the required payments.
If, at the end of 36 months he still owes money, the trustee will arrange for a mediation session, and from that he can be granted additional time to pay.
Your situation is complicated, but the starting point will be to meet with your trustee to work out a plan.  We strongly suggest you request a meeting with the trustee, not with a junior clerk at the trustee firm.

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