What happens to my house when I file for personal bankruptcy?

House: when you meet with a Licensed Insolvency Trustee for your initial assessment, you’ll need to bring with you the fair market value (“FMV”) of your house (ideally a professional appraisal) and a statement showing the balance you have left on the mortgage.

If the mortgage balance is equal to or greater than the FMV, your house has no equity. “Equity” is the difference between the value of an asset and the amount owing on the loan secured by that asset. If your house has no equity, then the trustee will have no interest in your home. You will have to continue making your mortgage payments to the bank if you want to keep the home. If you stop making payments, the bank will be in its rights to seize the home.

If the mortgage balance is greater than the FMV, your home has equity. The trustee is required to realize on the equity in the home because it is an asset which must be realized for the benefit of your creditors.

In this case, the trustee has two options to realize on the home’s equity:

  • Sell the home, pay off the mortgage from the sale proceeds and deposit what’s left over into her trust account for the benefit of your creditors; or
  • Allow you to keep the home, subject to you paying her the equity in the home. You would be in effect “buying out” the trustee’s legal interest in your home.

For example, if your home had a value of $120,000.00 with $100,000.00 left on your mortgage, the trustee would require you to pay her $20,000.00 in order for you to keep your home. In most cases, the trustee will allow you to pay the $20,000.00 in monthly installment payments. Also keep in mind that in addition to paying the trustee, you will need to continue making your mortgage  payments to the bank.

Please note that certain provinces have exemptions for the equity in principal residences. For example, in Alberta the equity you have in your home is exempt from realization by the trustee if it’s below $40,000.00 (this is reduced if you’re a co-owner). Therefore, the information outlined above is subject to the exemption limits in your province. Here is a link to a list of provincial exemptions.

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