How to protect your home equity from bankruptcy

The first question anyone about to file for bankruptcy asks is almost always, “What happens to my house?” You spent years saving up a down payment on your home and you’ve sacrificed a lot to make mortgage payments and build equity in your home over the years.

Whether it was due to job loss, illness, the cost of caregiving, or any number of circumstances, you owe the banks, credit card companies, utilities, and other unsecured lenders more money than you can afford to repay. Now you’re worried about whether they can claim the house you’ve worked so hard for.

When you file for bankruptcy, you are essentially saying that you do not have the disposable income to make debt payments, and you want to eliminate the debt you can’t pay. Escalating interest rates make it harder and harder to keep up with minimum payments, while loans like payday loans can quickly become unmanageable. Insolvency proceedings are there to protect you by eliminating debt you can’t afford.

However, your creditors are owed something. In a bankruptcy, many of your assets can be sold to pay off a portion of your debts. This is done through a bankruptcy trustee, now known as a Licensed Insolvency Trustee. Equity in your principal residence could be at stake as well, but how much is the question.

A bankruptcy trustee such as David Sklar in Toronto can give you a better understanding of what kind of assets you may have to sell in a bankruptcy. These typically include secondary properties like cottages, vacation homes, or income properties, investments not included in your RRSP, RRSP contributions made in the last 12 months, inheritances, art, jewelry, and vehicles in which you have over a certain amount of equity. But home equity is often the biggest concern.

In Ontario, where David Sklar & Associates are located, the government recently updated its exemption limits. Before 2016, there was no exemption for equity in homes in Ontario, while other jurisdictions had this type of protection for years. Now, there is a $10,000 exemption limit on your primary home in Ontario. Depending on where you live, the rules may be different, so ask a local bankruptcy trustee.

If you have less than $10,000 in equity in your home, you likely won’t have to worry about losing it in a bankruptcy. If you have made more progress on your mortgage, your home may be at risk. What can you do to protect your home if that’s the case?

Bankruptcy trustees such as David Sklar & Associates often recommend consumer proposals to debtors with assets and property. A consumer proposal allows you to repay a reduced debt back to your creditors over time, without interest. Consumer proposals are similar to bankruptcy, but instead of selling assets and concluding the bankruptcy rather quickly, consumer proposals can last for up to 5 years.

If you’re working or earning an income, a consumer proposal is often a better way to protect your assets from bankruptcy proceedings. Talk to a bankruptcy trustee about how you can protect your home through insolvency proceedings.