Can I file for bankruptcy if I own a house?

Homeownership is an important milestone for many Canadians. The thought of losing that home after years of hard work is scary—but so is drowning in debt. Mortgages are often the last payment people fall behind on, but even if you’re keeping up with your mortgage, other debts can pile up fast. This leaves many homeowners to wonder, “can I file for bankruptcy and keep my house”? The short answer is yes. In fact, consolidating your other debt into a consumer proposal or bankruptcy could help you keep up with mortgage payments—but the process can be complex. Here’s what you need to know before filing for bankruptcy while owning a home.

Will I lose my house if I file for bankruptcy?

In Canada, bankruptcy will discharge or eliminate your unsecured debts—like credit cards, personal loans, and CRA tax debt—but mortgages are considered secured debt. This means that the home itself is used as collateral if you fall behind on payments. Bankruptcy doesn’t include secured debts like your mortgage or property taxes, so staying up to date on those payments is crucial if you’d like to keep your home. The good news? Bankruptcy can free up room in your budget by eliminating your unsecured debts, making it easier to manage your mortgage.

Can bankruptcy stop a foreclosure in Canada?

No, bankruptcy doesn’t stop foreclosure. Foreclosure is a legal collections process for secured debts—like your home. Bankruptcy only settles and provides creditor protection for unsecured debts. Even though bankruptcy can’t stop foreclosure, you can still file to get relief from your unsecured debts—leaving you with more money for mortgage payments. However, you may have to pay your creditors for any equity that falls outside of your province’s exemption.

If you’re facing foreclosure, speak to a Grant Thornton Licensed Insolvency Trustee. We can help you explore alternatives—like a consumer proposal—before you lose your home.

What happens to my home equity in bankruptcy?

When you file for bankruptcy, your Trustee takes account of all your assets (any items of value) and uses them to repay as much of your debt as possible. These assets can include investments, vehicles, collectibles, and even your home’s equity.

Home equity is the predicted net profit you’d receive if you sold your home. You calculate it by taking your home’s assessed value and subtracting the amount remaining on your mortgage. For example, if your house is valued at $700,000 and you owe $620,000 on your mortgage, your home equity is $80,000.

Provincial guidelines determine how your assets are handled in bankruptcy. Each province has its own home equity exemption. For example, in Alberta, $40,000 in equity is exempt from bankruptcy. Using the above example, you’d keep $40,000 of the equity and owe the remaining $40,000 to your creditors. Not all provinces have a home equity exemption—so, in the above example, your creditors would receive the full $80,000.

In summary, if you can repay any equity owed, keep up with your mortgage and/or home equity line of credit (HELOC) payments, and make your bankruptcy payments, you can keep your home during your bankruptcy.

How can I repay home equity in bankruptcy?

Home equity can be a deciding factor when considering bankruptcy. While having equity in your home doesn’t disqualify you from filing, paying $80,000 or even $20,000 to creditors isn’t easy if you’re already struggling with debt. If you have home equity that you can’t afford to repay but want to reduce debt like credit cards or payday loans, you still have options:

• Refinance your home. You can access the equity in your home through a second mortgage or a HELOC to repay your debt. This type of financing is secured debt, meaning you’re borrowing against your home’s available equity—using your home as collateral for the loan. To be successful, you must keep up with its payments in addition to your original mortgage and your bankruptcy or consumer proposal payments.

• Use a payout plan. You have the option to include the equity you owe creditors in your insolvency filing and pay it out over the duration of your file. However, some people struggle to repay equity in a short bankruptcy (roughly nine months). Alternatively, filing a consumer proposal can make this easier by spreading payments out over five years.

• Sell your home. Never the ideal situation, selling your home gives you access to its equity, and could potentially cover some if not all your debt. If you need to subsequently file bankruptcy, this doesn’t make it impossible for you to get another mortgage. In fact, for some people, bankruptcy is the best route to kickstart rebuilding credit and securing homeownership.

Once you repay any equity owed and complete your bankruptcy, your unsecured debt is discharged and you can move forward without financial stress weighing you down.

If you own a home and are struggling with overwhelming debt, ask yourself this question: “If I could deal with all my other debts, would paying my mortgage be easier”? Our team of debt solutions professionals help Canadians answer this question every day. By eliminating unsecured debt, a bankruptcy or consumer proposal can lower your monthly debt payments, making your mortgage payments easier to manage. Learn more about how bankruptcies work in Canada to better understand if this is the right debt solution for you.

If you’re ready to start your journey to debt freedom—homeowner or not—the first step is speaking to our team. Book a free, no judgement consultation.