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What is mortgage foreclosure?

If you accumulate arrears on your mortgage payments, the lender may decide to take legal action against you. The lender may choose to sell your home by exercising a right of sale to recover the debt, or they may become the owner through foreclosure.

Under this second option, the lender can obtain an order from the Supreme Court of Canada to reclaim the title to your property. If this occurs, all mortgage payments you have already made, various amounts invested in the home, and the home's equity will be lost.

The Foreclosure Process

The foreclosure procedure is lengthy and involves several steps:

• The lender files a statement of claim with the court.
• You have 20 days to file a statement of defence.
• Once this period expires, the mortgage is declared in default.
• The lender requests a foreclosure order.
• If you have an opportunity to repay your arrears, the court may issue a redemption order, granting you a specific timeframe to make the repayment.

Generally, the repayment period set is six months. If you are unable to pay within this timeframe, your home will be foreclosed upon, and the lender will obtain authorization to sell it.

Your Options

If you are able to bring your mortgage payments up to date, you can halt the foreclosure process. This option benefits both you and the lender, who will recover their funds; therefore, finding a mutually agreeable plan remains the optimal solution.

The foreclosure process typically lasts between 6 and 10 months, during which you should actively seek solutions to improve your financial situation. If you fail to act within this timeframe, full ownership of the property reverts to the lender, and you forfeit all your rights. The lender can then decide what to do with the property, likely opting to sell it. Therefore, it is crucial to explore the best alternatives to halt the foreclosure process.

Foreclosure and Power of Sale

Foreclosure grants the lender legal title to the property, meaning all proceeds from its sale go directly to the lender. If the property sells for less than the outstanding mortgage balance, the lender incurs a loss and cannot pursue you for the deficit. Given the lengthy process and the risk of financial loss without recourse to recover the difference, foreclosure is relatively uncommon in Canada.

A Power of Sale is a process used to recover overdue mortgage payments. In this procedure, the lender requests court authorization for you to vacate the property so they can sell it. The lender does not acquire legal ownership but is granted 'the power' to sell the property.

Under a Power of Sale, if any funds remain after the mortgage and associated costs are paid, the surplus is returned to the homeowner. Conversely, if there is a deficit, the lender retains the right to pursue the borrower for the outstanding amount. Foreclosure is rarely used in residential real estate; the Power of Sale is a more common practice.

The Differences Between Foreclosure and Bankruptcy

To understand the distinction between foreclosure and bankruptcy, it is essential to differentiate between secured and unsecured debts.

– An unsecured debt: a debt for which no asset is pledged as collateral (e.g., credit card debt).

– A secured debt: a debt backed by collateral, allowing creditors to seize your assets if you fail to make payments (e.g., a mortgage).

A bankruptcy is an insolvency process designed to eliminate your debts and improve your financial situation. This process only includes secured debts.

Foreclosure is a situation where a lender decides to force the sale of a property because the borrower has failed to repay the loan. During a foreclosure process, the lender seizes your home to sell it and recover their funds.

In Canada, bankruptcy does not necessarily lead to the loss of your home, nor does it halt the foreclosure process, as a mortgage is a secured debt. Furthermore, bankruptcy negatively impacts your credit score. Nevertheless, it can allow you to eliminate some of your other debts, potentially freeing up funds to pay your mortgage.

The rules vary slightly in each province. Therefore, your Licensed Insolvency Trustee will explain what happens to your home and mortgage if you declare bankruptcy, and how filing for bankruptcy may affect foreclosure.

Should You File for Bankruptcy Before or After Foreclosure?

This is a very common question: Should you file for bankruptcy before or after foreclosure?

We will now explain the differences between these two scenarios.

Bankruptcy to Prevent Foreclosure

Generally, before initiating the foreclosure process, the lender will explore all avenues to secure their payments. This provides you with time to address your financial situation, and bankruptcy may emerge as a viable solution.

In most cases, if you find yourself unable to pay your mortgage, it is often due to struggling with several other debts. It would then be advisable to contact a Licensed Insolvency Trustee to help you resolve these issues and improve your financial standing.

A bankruptcy proceeding can enable you to eliminate other debts and improve your finances, allowing you to catch up on mortgage payments. When you file for bankruptcy and are able to keep your mortgage payments current, Canada's Bankruptcy and Insolvency Act provides you with protection.

Indeed, the law stipulates that a mortgage creditor does not have the right to cancel your loan simply because you have declared bankruptcy or even filed a consumer proposal.

Bankruptcy to Address Mortgage Deficiencies

If the lender decides to exercise their Power of Sale and the house sells for less than the outstanding mortgage balance, they may ask you to pay the difference. When you declare bankruptcy in Canada while your mortgage is underwater (i.e., the property value is less than the mortgage balance), the deficit between the sale value and the mortgage balance becomes an unsecured debt.

Therefore, in a bankruptcy or consumer proposal, when you surrender your home, you are not required to pay the deficit. If your lender waives this deficit before you declare bankruptcy, and you do not qualify for exceptions that would release you from the tax implications of the canceled debt, a subsequent bankruptcy filing cannot eliminate your tax liability, and you will still owe taxes. However, if the lender seeks to charge you for the difference, and you subsequently declare bankruptcy, the bankruptcy can discharge your deficit debt.

Other Measures to Combat Foreclosure

If you find yourself in a difficult situation where you fear losing your home, it indicates you are overwhelmed by debt. It is crucial to be aware of all available alternatives and to do your utmost to combat over-indebtedness to retain your property.

1. Request a Payment Deferral

You can always try to renegotiate your mortgage to extend the payment period and reduce your monthly payments. This is a fairly common practice, especially during the economic crisis caused by COVID-19.

2. Find a New Source of Funds

You might also consider finding a new lender if your current one is unwilling to negotiate. However, new mortgage loans often come with very high interest rates. If the foreclosure process has not yet begun, you could try to sell the house yourself, especially if you anticipate a positive net value from the sale.

3. File a Consumer Proposal

Filing a consumer proposal can allow you to keep your home. This will help reduce your other debt problems, and filing before foreclosure can improve your financial situation, enabling you to bring your mortgage payments up to date.

How will your credit score be affected?

If you are overwhelmed by debt and have declared bankruptcy or are facing foreclosure, you will need to ensure better management of your credit. In the case of bankruptcy, you will be required to attend two financial counseling sessions to better learn how to use credit and, most importantly, manage your debts responsibly.

Both of these procedures negatively affect your credit score. It will then be difficult to obtain a new mortgage in the future unless you can prove to lenders that you are capable of repayment. However, certain good practices can help you improve your credit score over time to regain these privileges.

To ensure you make the best decisions, especially at the right time, Groupe Serpone offers you a free consultation and guarantees support from an expert team who will know how to improve your finances.

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