What Happens to the Equity in Your Home If You Declare Bankruptcy?

Life can throw you curveballs. When you’ve fallen on hard financial times and find it difficult to pay your debts, you may have to declare personal bankruptcy.

If you own your home and have built up some equity in it, you’re likely wondering what will happen to that equity. Unfortunately, the news isn’t very bright when it comes to bankruptcy laws and homeownership in Canadian provinces and territories.

Allowed to keep some equity?
The amount of equity you will be allowed to varies from province to province. Essentially, the concept is the same throughout the country—if you have a substantial amount of equity built up in your home when you go bankrupt, you can’t keep the house in bankruptcy. Any amount of equity above what you’re allowed to keep based on where you live in Canada must be paid to your creditors.

What happens to your home after you declare bankruptcy is based on three questions:

• What is my bankruptcy exemption limit?
• Do I really have equity in my home?
• What options do I have?

How much equity have I really built up?
Equity is the money you’ll have left over after the sale of your home and the costs that accompany the sale. They include the mortgage, realtor and lawyer fees, taxes, outstanding bills, and any mortgage discharge penalties, etc.

As stated, the amount of equity you’re allowed to keep depends on where you live in Canada. Each province and territory has its own guidelines.

Your best options?
If you have a lot of equity in your home or you own it outright, you probably wouldn’t declare bankruptcy in the first place. You could sell the home with the help of a realtor and do what a bankruptcy trustee would do yourself.

Here are some options to consider:

• Sell your home and use the proceeds to pay down your debt without declaring bankruptcy
• Think about re-mortgaging the property
• Borrow against the equity in your home and pay the trustee to keep your property
• File a consumer proposal

Do you have little or no equity in your home?
A bankruptcy trustee will allow you and your mortgage company to decide what to do if the equity you have in your home is negligible. The mortgage company will obviously want you to continue to pay the mortgage.

You could surrender the home to the mortgage company and include their loss into the bankruptcy or consumer proposal. If this is your decision, it’s best to do so before you file for either bankruptcy or for a proposal.