July 15, 2017

Foreclosure and Bankruptcy

When you are struggling with paying your debts and have missed one or more payments on the mortgage on your personal residence, you may be facing foreclosure. The foreclosure process may vary by province so the information below may not be accurate for provinces other than British Columbia.

A missed payment on your mortgage is a default in the mortgage contract which allows the lender to commence foreclosure, a legal process to seize your home to sell for repayment of their debt. This can be frightening as it may mean you lose your home. However, you have options when facing foreclosure and, if you are able to use any of these to solve your problem, it is important to act quickly to avoid or stop the foreclosure process.

  • Payment of arrears. In the case of a single missed payment, you will generally receive a reminder from your lender. If you are able to pay, contact them to make payment arrangements. They may also be able to assist you with temporary financial situations to avoid foreclosure even after formal demand for repayment has been made.
  • Redeem your mortgage. You may be able to obtain a mortgage with another lender. There will generally be costs other than the current mortgage balance that will also have to be paid. These can include strata fees, property taxes, interest or penalties under the existing mortgage, payout of judgements/liens registered on title by other creditors, etc. A mortgage broker may be able to provide some assistance to you in locating another lender during this critical time.
  • Sell your home and pay off the mortgage. If you have sufficient equity in your home, you may be able to sell your home and pay off the mortgage. Equity is the value after the mortgage and interest, any penalty on the mortgage for selling before the end of term, other debts or judgments registered on your home and any selling costs such as commission and legal costs.

Lenders are not in the business of selling homes and may face losses in a foreclosure, so they will generally prefer to come to a reasonable solution where possible. It is important to maintain communication with your lender to prevent or stop the foreclosure process.

If the bank has served you with a letter with a deadline demanding payment and you are unable to come to a reasonable solution with your lender, the next step is for the lender’s lawyer to issue a petition to the court to start the foreclosure process. The owner(s) of the property will generally receive this notice in person.

The foreclosure process is the court process for the lender to confirm that their debt exists, the total amount of their debt, to set a redemption period for you to redeem or pay off your mortgage, and to obtain conduct for the sale of your property. If you believe that the issued legal documents are incorrect or that the bank is treating you unfairly, you should consider obtaining legal advice. Even if you can’t afford to pay for a lawyer, you may be able to obtain some advice from the Lawyer Referral Service or obtain general information from the free on-line booklet issued by the Legal Services Society “Can’t Pay Your Mortgage? What you can do if you’re facing foreclosure” at http://www.lss.bc.ca/publications/pub.php?pub=15 . The booklet includes a list of agencies that may be able to assist you.

It is important for you to locate other living arrangements if you are unable to redeem or pay back your mortgage. Once the redemption period has expired, you will be required to move out of your home. This period is at the discretion of the court, generally set at six months, but may be less. You will have to cooperate with providing access to your home for the realtor to show potential buyers during this period.

If you are considering bankruptcy, the bankruptcy may occur at any stage during the foreclosure process and may impact your decision on what action to take. The information provided below is general and should not be construed as legal advice. The legislation on land title, foreclosure and bankruptcy is complex. However, you should be aware of the impacts of bankruptcy on your home and mortgage in considering your options.

  • Secured creditors in bankruptcy. A mortgage lender is a secured creditor and retains their rights in bankruptcy. This means they can continue with their existing payment arrangements on a mortgage that is current and not in foreclosure, continue a foreclosure action started prior to bankruptcy, or take foreclosure action for a default occurring during the bankruptcy. The mortgage debt must be listed in your documents if it exists at the date of the bankruptcy and the lender will receive notice of the bankruptcy.
  • Equity in personal residence. The equity in your personal residence in a bankruptcy is the portion remaining after the mortgage, interest and selling costs. Unlike the calculation of equity when selling your property to pay off your mortgage, the judgment creditors are not considered as they are no longer able to take action once you are discharged from bankruptcy. If you reside in your home at the date of bankruptcy, you are entitled to claim $12,000 equity in a home in the Lower Mainland of BC and $9,000 in other areas of BC. This exemption may be different for other provinces and territories.If there is equity in your home over the basic exemptions listed above, it vests in the trustee for the benefit of your other creditors. You are not entitled to retain the non-exempt portion of your equity and will have to discuss with your trustee options to have this realized if you wish to retain your home.
  • Foreclosure prior to the date of bankruptcy – No equity. If the foreclosure process has started, and there is no equity in your property, you may not want to take any action as any debt remaining after the foreclosure process will be included in your bankruptcy. This debt is included whether or not the foreclosure has completed at the date of bankruptcy if it was commenced prior. However, if there is another individual on the mortgage that has not filed bankruptcy, they will be responsible for the full amount of any shortfall remaining on completion of the foreclosure process.
  • Foreclosure prior to the date of bankruptcy – Equity.   If there is equity in your property and you believe that you may be able to take advantage of any of the options to stop the foreclosure process, you should obtain legal advice on your options and possibly defer filing a bankruptcy. If there is sufficient equity available in your home, you may be able to obtain additional funds by refinancing your mortgage or obtaining a second mortgage to pay out your unsecured creditors or file a proposal with a licensed insolvency trustee to settle the debt of your other creditors. However, although you may qualify for a higher mortgage, you should review your budget to ensure that you can maintain the new mortgage payments in the long term based on your known financial circumstances.
  • Credit rating and obtaining a rental home during bankruptcy. If you are looking for a rental to move into during the foreclosure process, you may find that some owners of rental properties or property managers may request a credit bureau search to check your credit rating. This does not mean that a low credit rating will not enable you to obtain a rental home, but you may be considered a higher risk. If you have a judgment from a foreclosure process or other creditor, or have filed bankruptcy, this information may be listed on your credit bureau report, and impact your credit score.

Where can I obtain more information?

Foreclosure and bankruptcy are both complex processes and each person’s situation will be different. You may have never experienced either position before and it is not unexpected that you may be feeling overwhelmed and not sure what to do. Take the first step and contact us for a free, confidential assessment of your financial options to avoid the consequences of taking no action.

Debora Kwasnicky

Debora has been actively practicing as a Licensed Insolvency Trustee since June 1997. She began her career with a national insolvency firm in 1984, attended university while working until her final year, returned to article to obtain her CA designation (now CPA, CA) and her trustee license before leaving in 2006 to open her own boutique firm. Her experience has been in various industries including construction, forestry, finance, retail and high tech. She currently focuses her practice on individuals and small businesses.