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It may be surprising to hear that many bankrupt people own their homes. Their house becomes an asset of the bankruptcy estate for the creditors, however, in some cases, the trustee has no interest in selling the house because the equity is minimal or even zero ($0) after taking the mortgage payout and estimated selling costs into account.  If the equity is zero ($0), the trustee may release the house back to the bankrupt person. Even if there is equity, the trustee may settle with the bankrupt person and allow them to keep the house by paying the value of the equity to the trustee.   It is not uncommon for people to purchase a variety of assets back from their trustee, including the equity in their home.

There was a time when the value of bankruptcy assets was determined at the date that the person filed for bankruptcy. However, due to a recent court decision, that is no longer the case. In Lepage (Re), 2016 ONCA 403, the Ontario Court of Appeal held that the trustee must determine the value of the asset on the date that the person is discharged from their bankruptcy, not just the date that they filed for bankruptcy. The Court went on to say that, if the value of the asset increases during the bankruptcy, then the appreciation in value is an asset for the creditors and the trustee must collect it for the creditors. This is significant because, depending on the circumstances, it can take years for a person to be discharged from their bankruptcy, and their assets may appreciate in value substantially over that time. A settlement made with the trustee at the date of bankruptcy may not be valid if the value of the asset increases afterward.

For example, in many current Ontario bankruptcies, home equity has risen to values that are greater than the amount of the debt. This is largely due to the surge in Ontario real estate values over the past few years. Consequently, many people who thought that they had settled their equity with the trustee are suddenly required to pay their debts in full to prevent the trustee from selling their house to comply with the Lepage decision. Most people want to keep their home. Therefore, many people faced with this situation of having to pay their debts in full in their bankruptcy are choosing to file a consumer proposal instead, and are seeking mortgage financing to fund the consumer proposal. A consumer proposal may be filed by a bankrupt person before they are discharged, and if the consumer proposal is accepted and approved, then the bankruptcy is annulled. Most are of the view that, if they have to pay their debts in full in a bankruptcy, then a consumer proposal is a better alternative because it is less damaging to their credit report in the long run, and may result in less fees and costs. A bankruptcy would remain on their credit report for seven (7) years after they are discharged from bankruptcy; while, a consumer proposal will remain on the credit report for only three (3) years after the proposal is fully performed.

Going forward, people with houses who cannot afford to pay their debts may be more hesitant to file for bankruptcy even if the current equity is zero ($0) for the simple reason that they do not know what the house equity will be when they are discharged, especially in a rising real estate market like we have in Ontario in 2017. Many of these people are instead considering other options, including a consumer proposal, where the future may be more certain.

If you are struggling with consumer debt or tax debt, you may wish to consult with a Licensed Insolvency Trustee to explore your options as soon as possible. After all, time is money… especially in a rising real estate market.