If you default on your mortgage, you risk losing your home to foreclosure and falling further into debt. Depending on your financial situation, the stakes of mortgage foreclosure vary and bankruptcy may be one of the steps you can take to combat foreclosure.
In order to make the best financial decisions for you, it is important to be well informed about the solutions available to you and to seek the advice of a licensed insolvency trustee to guide you in your choices.
What is mortgage foreclosure?
If you fall behind on your mortgage payments, the lender may decide to take you to court. The lender may decide to sell your home by exercising a right of sale to collect the debt or become a foreclosed homeowner.
In this second option, the lender can obtain an order from the Supreme Court of Canada to repossess title to your property. If this happens, all of the mortgage payments you have already made, the various amounts invested in the home, and the equity in the home will be lost.
The data entry process
The data entry procedure is long and takes place in several stages:
- The lender files a claim for compensation with the court
- You have 20 days to respond with a defense.
- When this time limit is exceeded, the mortgage is declared in default of payment
- Lender applies for a foreclosure order
- If you have a chance to pay back your delay, the court may issue a buy-back order giving you time to repay.
Generally, the deadline for repayment is six months. If you are unable to pay on time, your home will be foreclosed and the lender will obtain permission to sell it.
If you are able to update your mortgage payments, you will be able to stop the foreclosure process. This option is in your best interest and in the interest of the lender who will be able to get his money back, so finding a plan that works for both parties remains the best solution.
The seizure procedure takes between 6 and 10 months and you should take advantage of this time to find solutions to improve your situation. If you do not act in time, full ownership of the property reverts to the lender and you give up all your rights. The owner can decide to do whatever he or she wants with the property and will probably think about selling it. It is therefore essential to choose the best alternatives that help you end the foreclosure process.
Foreclosure and power of sale
Seizure gives the lender legal title to the property, so all profits from the sale accrue to the lender. If the sale of the home comes in at a price lower than the mortgage balance, the lender will record a loss and will not be able to ask you to pay the deficit. Because of the lengthy process and the risk of losing money without being able to ask you for the difference, foreclosure is quite rare in Canada.
Power of sale is a process for collecting mortgage arrears. In this process, the lender asks the court for permission for you to leave the home so that it can be sold. This means that the lender does not have legal ownership, but has the “power” to sell it.
In a power of sale, if there is still money left over after paying the mortgage and fees, it is returned to the owner. And if there is a shortfall, the lender retains the right to sue the borrower for payment. Foreclosure is rarely used in residential real estate; power of sale is more common.
The differences between foreclosure and bankruptcy
To understand the difference between foreclosure and bankruptcy, you need to distinguish between secured and unsecured debts.
– Unsecured debt: a debt for which you do not have collateral (example: credit card).
– Secured debt: a debt that has collateral behind the loan and your creditors can seize your assets if you don’t pay them (example: mortgage).
Bankruptcy is an insolvency process that allows you to eliminate your debts to improve your financial situation. This process only includes secured debts.
Foreclosure is a situation in which a lender decides to force the sale of an asset because the borrower has not repaid it. In a foreclosure process, the lender forecloses on your home to sell it and get their money back.
In Canada, bankruptcy does not necessarily result in the loss of your home, but neither does it stop the foreclosure process, as the mortgage is a secured debt. In addition, bankruptcy has a negative impact on your credit rating. Nevertheless, it may allow you to eliminate some of your debts in order to pay your mortgage.
The rules are a little different in each province. Your insolvency trustee will explain what happens to your home and mortgage if you declare bankruptcy, and how declaring bankruptcy can affect foreclosure.
Declare bankruptcy before or after seizure?
This is a very recurring question: Is it necessary to declare bankruptcy before or after the seizure? We explain the difference between the two situations.
Bankruptcy to prevent seizure
Usually, before initiating foreclosure proceedings, the lender will make every effort to obtain its payments. This gives you time to take care of your financial situation and bankruptcy may present itself as a solution.
In most cases, if you find yourself unable to pay your mortgage, it is because you are struggling with several other debts. It would then be wise to contact a licensed insolvency trustee to help you resolve these problems and improve your financial position.
Bankruptcy proceedings can allow you to eliminate other debts and improve your finances to catch up with mortgage payments. When you file for bankruptcy and you can keep your mortgage payments up to date, the Bankruptcy and Insolvency Act in Canada protects you.
In fact, the law stipulates that a mortgagee does not have the right to cancel your loan for the simple reason that you have declared bankruptcy or even filed a consumer proposal.
Bankruptcy to cope with the lack of mortgage credit
If the lender decides to apply their power of sale and the house sells for less than the home equity, they may ask you to pay the difference. When you declare bankruptcy in Canada while your mortgage is submerged, the shortfall between the sale value and the mortgage balance becomes an unsecured debt.
For example, in a bankruptcy or consumer proposal when you give up your home, you don’t have to pay the deficit. If your lender waives this deficit before you declare bankruptcy, and you are not among the exceptions that will release you from the canceled debt, the subsequent declaration of bankruptcy cannot eliminate your tax debt and you will have to pay taxes. On the other hand, if the lender charges you to pay the difference and you declare bankruptcy afterwards, bankruptcy can erase your deficit debt.
Other measures to fight foreclosure
If you find yourself in an awkward situation that makes you afraid of losing your home, you are in over-indebtedness. It is important to be aware of all the alternatives and do your best to fight over-indebtedness to keep your property.
1. Request deferral of payment
You can always try to renegotiate the mortgage to extend the payment period and lower the monthly payments. This is a fairly common practice, especially during the economic crisis caused by COVID-19.
2. Finding a new source of money
You may also want to consider finding a new lender if your lender is not willing to negotiate. Nevertheless, mortgages often come back at very high interest rates. If the foreclosure has not yet started, you can try to sell the house yourself, especially if you expect a positive net worth from the sale.
3. Submit a consumer proposal
Applying for a consumer proposal may allow you to keep your home. It will help you reduce your other debt problems, and filing for bankruptcy before foreclosure can improve your financial situation and allow you to update your mortgage payments.
How will your credit rating be affected?
If you are over-indebted and have declared bankruptcy or are subject to foreclosure, you will need to better manage your credit. In the case of bankruptcy, you will have to attend two financial counseling sessions to better learn how to use credit and, above all, manage your debts responsibly.
Both of these procedures negatively affect your credit rating. It will be difficult to obtain a new mortgage in the future unless you are able to prove to the financiers that you can repay them. Thankfully, there are some practices that can help you improve your credit rating over time so that you can enjoy these privileges again.
To be sure to make the best decisions and especially at the right time, Groupe Serpone offers you a free consultation and guarantees that you will be taken care of by a team of experts who will know how to improve your finances.