A mortgage is a debt secured against the value of your house. Secured debts, including a mortgage, are not debts covered by filing a personal bankruptcy. If you own a home and are experiencing financial difficulty, how your mortgage debt is affected by filing bankruptcy depends on whether you decide to keep your house or not. The choice depends on whether you can afford to keep up with your monthly payments, or even if you want to. Let’s look at these two situations separately.
Keeping Your Home
Many people feel strongly about keeping their house; it is a home for their family and they worked so hard get it and manage it. Mortgage or not, they want to find a way to stay in their home.
If you want to keep your home after filing bankruptcy you must be able to:
- pay any equity in your home to the trustee
- keep all your mortgage payments current.
In the first point, because the equity in your home is considered an asset of your bankrupt estate, your trustee must realize on this asset. They don’t however have to sell your home. You can ‘buy out’ any equity in your home by making larger payments to your trustee during your bankruptcy. If these payments are too expensive, you can also consider a consumer proposal, which will allow you to stretch those payments over a longer period of time.
In many cases however, home owners who file bankruptcy have no equity in their home. The solution to keeping a home in that case is much easier. To be able to keep your home you must keep your mortgage payments current. If you do not make your payments then the mortgage company can come and take your house.
As long as your payments are current, a mortgage company cannot change anything in the mortgage agreement because of a bankruptcy being filed.
If you have been struggling meeting your mortgage, you may find filing bankruptcy can eliminate the financial strain of making other debt payments. This can free up enough money in your budget to keep up with your mortgage.
As for renewal, if you have a good record on your mortgage payments, then generally the mortgage company will do a straight renewal on the mortgage when it comes due. You will need to be willing to accept the banks renewal offer however. It will be difficult to shop around with other mortgage companies while in a bankruptcy so you may find you are not able to negotiate a lower rate elsewhere until after your bankruptcy is finished and your credit re-established.
Surrendering Your Home
For some people, their house is too expensive for their budget.They cannot afford the mortgage and all the costs associated with the house even if bankruptcy has taken care of the other debts. If this is the case they have an option to surrender the house back to the mortgage company. Any shortfall on the sale of the house is now an unsecured debt that is dischargeable in a bankruptcy. The shortfall is the amount the remains outstanding with the mortgage company after they sell the house, pay property taxes, utilities, lawyers, real estate commission and costs for maintaining the house.
As you can see, while a mortgage itself is not affected by bankruptcy, filing bankruptcy can provide you with an opportunity to review your housing costs and make a decision for the long term. If you’d like help with making this decision, talk to a local Ontario bankruptcy trustee.