Save your Home – what you need to know!
You can file a bankruptcy or proposal to save your home from exposure to creditors. What you need to know is that the price of real estate has little to do with the real value, the price was bolstered by a feeding frenzy fueled through access to cheap debt and driven in part by a combination of lockdowns and realtors encouraging bidding wars and site-unseen offers
Today the market is slowly correcting, at the height of the boom (February 2022) the average house price in London, Ontario, was $832,000 that average has plummeted to $664,000 in May of 2023 – a drop of over 20%
Interest rates have still not reached historical averages of 7% – yet incomes continue to lag and more and more Canadians are falling into poverty. A recent report by Bank of Montreal economists identified low and overleveraged incomes as the greatest challenge to home ownership.
You can file for bankruptcy or file a proposal to creditors and still keep your home. If there is equity in the home, you may need to make arrange, with your LIT, to pay some extra money to your bankruptcy or proposal. However, as prices correct, and mortgage expenses, including penalties and interest rise most homeowners have less equity than they had when they purchased their homes.
Ontario law allows each debtor who has equity in their home to claim an exemption of $10,783 on their principal residence. If you and your spouse are joint tenants on your property that means that the first $21,566 is exempt from your creditors. It also means that if the value of the equity does not exceed that amount your creditors cannot force a sale of your property.
The big question that arises is “what is the equitable value?” generally speaking the equity in your house is what is left over after a sale transpires. When the house is being kept and not sold, the costs of sale are called “notional costs”. In reality they are not “notional” at all – whether the house is sold today or tomorrow there will be costs involved and they will be paid, no one works for free.
- The average real estate commission, across Canada, is 5% of the sale price plus HST.
- The average legal fee is around $2,000 plus HST.
- The average penalty, for paying out a mortgage early, is three months of interest payments.
If you sold a house in London for $664,000 the realtor would get paid $37,516, your lawyer $2,260+/- and the penalties and interest would likely be about $6,500 (based on a $500,000 mortgage). You and your spouse would each be entitled to an exemption $10,783 leaving about $96,158 in tangible equity.
Bankruptcy or Proposal:
Bankruptcies are basically liquidation processes, the LIT is required to determine the value of your non-exempt property and either arrange with you to settle for its value or to sell it to get at the equity, which is then available for distribution amongst creditors.
Bankruptcies can carry with them a great deal of uncertainty regarding payments into the estate. The courts decided that real property must be valued twice – at the outset of the filing and again at time of discharge. If your house increases in equitable value, the LIT will seek more payments, and conversely when the value decreases should adjust the amount payable accordingly. However, it is the LIT’s duty to maximize the returns to creditors.
Similarly if your income situation improves during your bankruptcy the LIT will adjust any surplus income payable to a higher value corresponding with the increase. Albeit, that mediation may help to smooth out payment arrangements
By contrast, a proposal predetermines the amount you will pay – the amount is negotiated with the creditors and remains stable throughout the process. This amount may be varied if you experience a significant material change, for instance a loss of a job. You LIT can call a meeting of creditors to seek an amendment to the original terms to allow you to complete the proposal with a modified payment arrangement.
Because of the uncertainty of real estate prices many creditors will still vote in favour of a proposal even when the proposal payments are below the liquidated value of the property. However, no so in a bankruptcy. Proposals add both certainty and flexibility to payment arrangements with creditors, which probably explains why proposals are the number one debt resolution choice amongst Canadians.