Go Bankrupt, or keep paying the Mortgage?

July 8, 2024

This is a real question some, particularly first time, homebuyers must deal with. You are the proud registrant on title of an average Canadian home – priced at $699,000. You took out an RSP loan for $70,000 at 9% for an RSP that was converted to a Home Buyers Plan (“HBP”) probably not the best advice you ever got from the bank, but oh well!

After paying your CMHC (bankers’ slush fund) fees and other costs you ended up with a mortgage for $664,000 and now have monthly payments of $4,014 on the mortgage plus property tax payments of $635 and RSP loan payments of $1,453 per month. Oh, and $389 must also be paid each month to avoid CRA penalties on the RSP you converted to the HBP.

Boy, oh boy, you got some great financial advice, didn’t you? Was it from a banker? Let’s continue our exploration – to be registered on title of this “home” you have committed to payments totalling $6,491 per month and the “price” of your home has already dropped by about 17% during the past two years, and it is still dropping.

If your salary is more than $120,000 you can barely afford those costs on your net income of $6,880 per month. And, if your income is that high congratulations you are in the top 7% of income earners (93% of the population earns less than you do). You probably also owe at least $40,000 on credit cards, requiring monthly payments of around $720, and likely have a car loan with payments of about $850 per month.

It’s good thing your spouse also earns at least a mean income, allowing you to afford food, given that food costs average about $25 per person per day in Canada. So, should you keep paying the mortgage or simply go bankrupt, walk away from all the debt, except the obligation to repay the CRA the presumptive taxes on the RSP withdrawal?

Well, let’s see: As a first time bankrupt you would be paying surplus income, assuming your spouse’s income is $54,000 per year (the mean value from 2022) you would be subject to the Superintendent’s Standards for the payment of surplus income for a period of 21 months, or a longer term at the court’s pleasure, for presumptive total of less than $40,000.

You may be able to rent accommodations for $3,500 less per month than your current housing cost outflow. Over the 21 months you’d be subject to paying surplus income you would be able to save about $35,000. Then, as house prices continue to collapse to approximate real “value”- you would be perfectly positioned to buy the same property for a more realistic value of $320,000.

Overall, ironically enough, filing for bankruptcy would save this couple hundreds of thousands of dollars and make living in Canada far more affordable. Now don’t get me wrong, I am not soliciting you to rush out and file for bankruptcy, but simply pointing out the reality of the times in which we live. Please back check my data and let me know if your conclusions are divergent or similar.