What Can You Expect To Hold Onto If You Declare Bankruptcy?

Acknowledgement: Many thanks to Karen Adler, CIRP, who reviewed and improved this series of posts. Karen is a federally-licensed Trustee in Bankruptcy with Rumanek and Co.

Karen has contributed to the educational materials and development of the national CIRP Qualification Program for trustees and conducts seminars on bankruptcy and consumer proposals for CAMH’s Problem Gambling Institute.

Today we continue the dialogue with Jordan Rumanek who is a licensed Trustee in Bankruptcy and Administrator of Proposals whose firm Rumanek & Company Ltd. processes well over a thousand insolvency files each year in the GTA.

We want to understand how bankruptcy affects homeowners and generally, what can people expect to hold onto if they declare personal bankruptcy.

Ross: Many people with debt problems are homeowners. They don’t want to give up their homes, but they may not be able to refinance their mortgages. What solutions can you offer these people?

Jordan: A debtor does not usually have to give up their home in a bankruptcy or a proposal. In a bankruptcy the trustee looks at the equity in the property. This is done by obtaining a current property valuation and a current mortgage statement. If there is little or no equity, the only person who would be able to take the house is the mortgage lender, such as the bank. They will only take the house if payments are not being made. If the payments are being made then the person should be okay.

If there is equity in the property then we would discuss a proposal. This could be in monthly installments or if possible, the property can be refinanced to make a lump sum payment to the creditors.

Ross: Is it true the rules today do not allow people to consider costs like mortgage prepayment penalties, real estate commissions, legal fees, and moving costs when determining how much equity they have in their homes?

Jordan: This is true. There was a court case a couple of years ago which states we cannot use the implied costs of sale for a sale which does not take place, to reduce the equity in the property. On the other hand, the courts have said in another case that the equity amount can be negotiated after the debtor declares bankruptcy.

Ross: So suppose a couple have a $300,000 townhouse with a $280,000 mortgage, and they wish to keep their home. As a practical matter, if they sold their house, they would have no money for themselves – in fact, they would owe money to the lawyer.

Jordan: Yes, you are correct if the house is sold there would be no equity. There would most likely be a shortfall, but the house is not being sold so the expenses are not being incurred. They can consider a proposal as an option, and they also have the right to negotiate a lower amount for the equity if they intend to pursue personal bankruptcy.

In certain bankruptcy situations, the Bankruptcy law requires any equity amount we agree on must be also be approved by the court. The trustee would make the application to court; the debtor would not have to attend.

Ross: So in other words, if you are a debtor, you should not assume you will lose everything near and dear if you initiate proceedings with a trustee?

Jordan: Exactly Ross. Very few homeowners actually lose their homes during the bankruptcy process, and if they do, it’s almost always their decision. The same could be said about a car. In Ontario a car has an exemption amount of $5,650.

Ross: What do you mean by exemption amount?

Jordan: Each province has legislation that sets out the value of property that cannot be seized against a debt. These exemptions apply in bankruptcy as well. In Ontario, cars and personal effects are each exempt to a resale value of $5,650, while household goods and tools of the trade are exempt to $11,300.

Some provinces have homestead exemptions, which allow a debtor to “keep” home equity up to a certain dollar amount.

RRSP’s are exempt except for any contributions made within 12 months prior to filing. And a life insurance policy may be exempt depending upon who is the designated beneficiary.

Ross: Thanks Jordan.

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