Secured Debts in a Bankruptcy in Canada
Secured debts – key questions
A debt secured by a mortgage on an asset, such as your house or car, will not be discharged by bankruptcy. However, bankruptcy and secured debts complicate each other. Three important questions are:
- Are your payments on the mortgage up to date? If not, the mortgagor can foreclose regardless of whether you are bankrupt. Most mortgages have a standard clause, allowing the mortgagor to repossess the asset if you go bankrupt. However, especially in the case of a house, they don’t often do this because it is more profitable for them to keep the mortgage going (if you can make the payments).Also, in the case of a house, are your payments on municipal taxes and utilities up to date? If not, the city or utility company can place a lien on the house, changing those debts from unsecured to secured.
- How much equity do you have in the asset? For bankruptcy purposes, equity is the excess of what the asset is worth over what you would have to pay in case of selling it, including the mortgage balance, outstanding property taxes and utility bills, and legal and real estate fees to sell it. If the asset is worth less than what you would have to pay, you have “negative equity”.
- Do you want to keep the asset?
Secured debts – what happens?
If have negative equity or you don’t want to keep the asset, you can simply default on the payments and surrender the asset to its creditor. The debt then becomes an unsecured debt, to be included in and discharged by your bankruptcy.
If you have no equity, the asset does not become involved in your bankruptcy, and you can keep it if you keep up the mortgage payments.
If you have positive equity, beyond any limit on its bankruptcy exemption value, the excess is considered an asset to be included in your bankruptcy estate. This can happen by your Licensed Insolvency Trustee’s seizing and selling the asset. However, if you can get the amount from some source like your family, you could keep the asset – and the mortgage, and the need to keep making payments.
Things to remember
- In a consumer proposal, your secured debts and assets would not be affected. This is one of many advantages of a proposal over bankruptcy.
- When you file for bankruptcy, you no longer have to make payments toward your unsecured debts. Therefore you may actually have more money available to pay your mortgage, property taxes, utilities, and car payments.
- Equity is complicated to measure – it is not just “fair market value”. Equity is further complicated by provincial bankruptcy exemptions. This is one of many reasons to consult a Licensed Insolvency Trustee, who has experience with such details.
Help with your debts
For help to sort out what happens to your debts when you go bankrupt in Canada, please consult a Canada Licensed Insolvency Trustee. There will be no charge for your initial consultation, and you will be taking the first step to financial peace of mind.