Most people know that if they become insolvent – that is, their cash flow decreases so that they can no longer meet their financial obligations – their assets will be at risk. For many consumers, their most valued asset is their home.
Fears about loss of a home frequently cause people to delay facing their financial problems, and to hesitate to make an appointment with a Trustee. They are afraid of what they might hear!
I was in this position in 2009, when the recession had cut my business income and I was having trouble paying my monthly bills. I was a fairly new homeowner at the time, and I considered my house my ideal lifelong home. I was terrified!
And what did I do? I worried for months, as things gradually worsened. But when I eventually went to see a Trustee, my fears were substantially eased. For better or worse, it’s always easier if you can see the road ahead.
In fact, if you are concerned that you could lose your home (and you don't want to) - seeing a Trustee earlier will give you the best chance of retaining your home.
One thing you will learn from the Trustee is if Bankruptcy is your only option, or whether Consumer Proposal might work for your situation. This is important, as Consumer Proposal poses less risk to your home ownership. In most Consumer Proposals, the home is not directly affected.
We know that the creditors would like the most return on what you owe them. In a Bankruptcy, the Trustee will calculate your assets, including the equity you have in your home. With certain exceptions that vary by province (ask your Trustee), the majority of these assets will be liquidated and the proceeds will go to your creditors.
If you have no equity in your home, your home ownership will not be directly affected by your Bankruptcy. If you have minimal equity, you may be able to keep your home by “paying back into the Bankruptcy” the amount of that equity. But if there is substantial equity, your home will need to be sold to realize its equity for the benefit of the creditors. Many individuals who go bankrupt must indeed sacrifice their homes.
Consumer Proposal is distinct from Bankruptcy in many respects, and a key difference is how it can affect your home. Similar to Bankruptcy, the creditors want maximum return. In fact, to accept your Proposal, they will expect a better return than they would receive if you filed for Bankruptcy.
That means the equity in your home still counts in your Trustee’s calculation of your assets. But in a Consumer Proposal, the home does not need to be liquidated to realize the equity … instead, you will have up to five years to pay your creditors more than they would have received if you had filed for Bankruptcy – and the home stays yours!
Indirectly, both Bankruptcy and Consumer Proposal can affect present and future home ownership via their effect on your credit rating. Although a mortgage cannot legally be terminated by a creditor just because you have become insolvent (as long as you are keeping up your payments), some consumers experience worries at renewal time. In practice, although your mortgage company is not obliged to offer you a renewal, most mortgage renewals are routine as long as you have kept your mortgage payments up to date.
Securing new financing for a new home purchase is also affected by Bankruptcy and Consumer Proposal. Your credit bureau report will include information on your Bankruptcy for five years after your are discharged, and the record of Consumer Proposal lasts for three years after it is completed. However, financing may be available during these periods at competitive rates, especially if you work at rebuilding your credit. Many consumers have had success both with major banks and with local credit unions.
This article has provided you with the basics regarding the differences between Bankruptcy and Consumer Proposal when it comes to your home ownership. However, a Trustee can tell you much more that pertains to your unique situation. Don’t hesitate to make a free appointment if you are experiencing financial stress, or worrying about any of the above.
My name is Wendy and I finished my consumer proposal in 2013. My goal is to help provide hope to Canadians in debt by sharing my experience, and advice as a consumer – and also to help eliminate the stigma and embarrassment surrounding people who file a consumer proposal or bankruptcy.