Can I Keep My Home If I File For Bankruptcy?

“Can I keep my home if I file for bankruptcy? What if I have no equity? On the other hand, what if I have equity?”

This is the first question people ask when they meet with a Licensed Insolvency Trustee for their initial assessment.

Factors To Consider When Keeping Your Home in Bankruptcy

In order for us to answer this question, we’ll need to examine the following factors:

1. 1. The fair market value of your house. We’d arrange for an opinion of value from a real estate agency or a full appraisal from a professional real estate appraiser.
   2. The current balance owing on any secured loans against the property (e.g., mortgage, home equity line of credit).
   3. The current balance owing to the municipality where the house is situated for any unpaid property taxes.
   4. Real estate commission and legal fees that would have to be paid if the house was sold.
   5. Your ownership interest in the home.
   6. Exemptions that may exist in the province where they house is situated. For example, if your property is in Ontario, you can keep up to $10,783 of equity in your home.

Home Has Equity

In the following example, Ted is thinking about filing for bankruptcy but is concerned about losing his home. During his consultation meeting with us, he provides the following information:

• • The fair market value of his home is $500,000
  • The mortgage balance is $400,000
  • There is $2,500 owed to the city for unpaid property taxes
  • Real estate commission would be $28,250
  • Legal fees related to a sale of the home would be $1,000
  • Ted’s home is located in a province where there isn’t an exemption for home equity
  • Ted is the sole owner of his home

We explain to Ted that upon his filing bankruptcy, we would have a legal interest in any equity in the house, which we must realize upon for the benefit of his creditors in his bankruptcy proceedings.

We calculate that if we physically sold Ted’s home to realize upon the equity, we would receive net proceeds of $18,250:

So, will Ted lose his home if he files for personal bankruptcy? Well, we could cut a deal with Ted whereby Ted can pay us $18,250 in return for us relinquishing our interest in the home. We could enter into a written settlement agreement whereby we would disclaim our interest as Trustee in Ted’s home in return for $18,250 from Ted. Such an agreement would require the approval of Ted’s creditors during the bankruptcy proceedings.

Upon receiving the $18,250, we would deposit the funds in the bankruptcy trust account for the benefit of Ted’s creditors. Accepting $18,250 from Ted would provide us with the same result as physically selling his home. So this would save us the time and cost of actually having to Ted’s home while Ted gets to keep his home in his bankruptcy.

There are however, a couple of complicating factors:

Time to pay settlement

What if Ted can’t pay the entire $18,250 up front? In that case, we could arrange for Ted to pay out the $18,250 over several months or even several years while he continues to live in the home. In order to secure payment of the $18,250 from Ted, we would enter into a security agreement with him and register a lien against Ted’s home with the assistance of a lawyer.

Notional costs

You’ll see in the table above that notional costs – real estate commission and lawyers fees totaled $29,250. And yet, our office and Ted are entering into a settlement, the property isn’t actually being physically sold and hence, the notional costs won’t actually be paid by our office.

Ted’s creditors might question why our office is giving Ted a $29,250 abatement in the calculation of the proposed settlement amount if the property isn’t even being physically sold. After all, it’s our job as Trustee to maximize the realization of assets for the benefit of Ted’s creditors.

This is the exact issue that was dealt with in several court cases where creditors objected to the Trustee giving bankrupts an abatement for notional costs such as real estate commission and legal fees when calculating a proposed settlement for the equity in a home. The well known cases are cited in the footnotes below.

The conclusion of the court in these cases is that the Trustee is required to drive a “hard bargain” when negotiating a settlement with the bankrupt, based on these guiding principles:

• • the Trustee has a duty to maximize the yield from all assets subject to practicalities and honesty;
  • it is impractical to sell assets at greater than fair market value;
  • special circumstances may require the sale of an asset at less than appraised or fair market value;
  • it is improper for a Trustee automatically to reduce fair market value by the full sum of disposal costs; and
  • it is improper for the Trustee to announce in advance that all he/she seeks is the fair market value minus debt and disposal costs.

So in the case of us and Ted, we should not have given Ted a $29,250 abatement for notional costs. We should have started negotiations by proposing a settlement of  $47,500 (the property’s fair market value minus the mortgage balance minus unpaid property tax). We should have also instructed Ted to seek independent legal representation for the purpose of negotiating with our office on the final amount to be settled, which would need to be approved by Ted’s creditors in his bankruptcy proceedings.

In practice, the final settlement amount would be somewhere between $18,250 (Ted’s desired outcome) and $47,500 (the Trustee’s desired outcome).

Home Has No Equity

Now let’s look at Ted’s case again, but suppose that the fair market value of his home is $400,000:

As you can see in the above table, if the value of Ted’s home was $400,000, he would have negative equity since the balance owing on his mortgage exceeds what his home is worth. Since there is no equity, we would have no interest in Ted’s home. Indeed, if Ted’s home was actually sold, there would be a shortfall owing to the bank of $76,100.

So in this case, we would inform Ted that we have no interest in his home and it won’t have any impact on his bankruptcy proceeding so long as he continues making his mortgage payments to the bank.

Ontario Exemption on Home Equity

In Ontario the equity you have in your home is exempt from realization by a Trustee if it’s below $10,783.00. If it’s above this threshold, the exemption doesn’t apply.

Footnotes

[1]  Re Malathy Manoharan (23 September 2015), Toronto 31-1812407 (ON Bankruptcy Court) [hereinafter Manoharan].

[2] Re Brisco, 2006 CarswellOnt 2770 (S.C.J.).

[3] Re Rassell, 1999 CarswellAlta 718 (C.A.).

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