Seven Things to Know if You are Facing Foreclosure in Canada
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By Taz Rajan| 1298 words | Read Time: 6 min, 10 seconds |Update Date: 2021/07/13
Foreclosure is a big word and can sound scary. You might have heard about someone who dealt with foreclosure, or whoever you have your mortgage with might have threatened it. In this article, we try to demystify this legal-sounding term, and help you understand your options.
What does foreclosure mean, and how does it work in Canada?
First, some definitions:
- Foreclosure is a legal process for a mortgage holder to take possession of a property after the owner defaults on the loan.
- The mortgage holder is the company that you pay for your mortgage.
- Default is when the terms of the mortgage are not being satisfied. This could include missing payments, not getting proper insurance, or not paying your property taxes.
The most common foreclosure scenario we see at Bromwich+Smith is when the client misses payments. This causes the mortgage holder (often a bank) to foreclose on the property so they can sell it and recover what they are owed.
If you have been hit with this situation, you may be interested to know what exactly happens. Do you have any choices during a foreclosure? Do you lose everything in a foreclosure? Do you have to go to court? Do I still owe money if my house is foreclosed? How will foreclosure affect your credit score, and for how long?
Let us explore the answers to these important questions:
- Do nothing – The bank will take legal action and you will lose the property. You will be entitled to any equity in the property after the bank sells it, however, there will be legal and selling costs to cover. The property may sell below market price, and if you had an insured mortgage you can be sued for any remaining balance. Often, after the bank sells the property there is what is called a deficiency on the property, which would be the difference between the amount the bank sells the property for and the mortgage balance, interest, and fees. The rules are different province to province, but in Alberta if the mortgage is conventional (20% or greater original down payment) the bank is unable to pursue the client for any shortfalls or deficiencies. However, most often, clients have high-ratio mortgages (less than 20% down payments) or home equity lines of credit (HELOCs) in which case the bank could pursue them for a shortfall.
- Try to work out a solution with the lender – This would typically involve getting caught up on missed payments or taking time to secure refinancing of the mortgage through a trusted mortgage professional. You may want to reach out to other lenders like your credit card companies and see if you can negotiate lower payments, lower interest rates or to freeze your payments for a few months while you catch up on your mortgage payments. This would be a good time to consider lifestyle changes. Can you reduce other expenses to make your mortgage payments? Can you increase income to help with other bills?
- Sell the property on your own – This would have to happen before the bank forecloses and is a bit of a race. It can be a tough pill to swallow, but maybe getting rid of the so-called asset is best for you and your family at this time. You can buy a home again in the future when you are on a stronger financial footing.
- Go to court and fight – This approach will likely require a lawyer (an extra expense) and can take a toll on your mental well being. There are no guarantees when it comes to court battles.
2. Can I Declare Bankruptcy to get out of Foreclosure?
An insolvency proceeding will not stop the bank from continuing the foreclosure process. Generally, if you want to keep your house you will need to get caught up on payments. An insolvency proceeding will not stop the foreclosure, but it will protect you from any fallout from the deficiencies. CMHC insurance is mortgage insurance that protects the bank against mortgage shortfalls. Basically, when a bank forecloses and there is a shortfall CMHC steps in to make sure the bank gets their money back. CMHC pays out the bank and then has what is called a “subrogated” claim against the client. This means CMHC will take over from the bank and sue the client to try to collect on the shortfall.
3. How can a Licensed Insolvency Trustee Help?
One thing that is unique to the Bankruptcy and Insolvency Act is the legal stay of proceedings. Only a formal restructuring program, administered by a Licensed Insolvency Trustee, offers a legally binding stay of proceedings which forces creditors into settlement. Once a Canadian has signed into their consumer proposal or bankruptcy, all creditor actions, including phone calls, demand letters, judgements and threats, are legally required to stop. This most important form of protection is one of the biggest advantages of filing into a consumer proposal or bankruptcy, offering protection for the honest but unfortunate Canadian from their creditors. Once you have filed, CMHC is unable to pursue you for any deficiencies.
4. When should I contact a Licensed Insolvency Trustee?
You do not need to wait until foreclosure has commenced or even been threatened, to file into a consumer proposal or bankruptcy. You can file at any time to secure the stay of proceedings and help you move forward. It is best to work out a solution with your mortgage lender well in advance of them issuing a notice to foreclose, and, if that does not go well contact a Licensed Insolvency Trustee immediately.
5. What if it is my rental property?
If the property in question is a rental property with tenants living in it the landlord is not required to tell the tenant about the foreclosure. When the bank takes possession of the property, they will likely issue a court order forcing the tenant to vacate, typically within 30 days. Regardless of which type of property it is owner occupied or rental, you want to reach out for help and professional advice BEFORE receiving notice of foreclosure.
6. Does Foreclosure Always Affect Credit Scores?
There once was a time when mortgages were not reported to credit bureaux, but that is no longer the case. Now that mortgages are being reported, foreclosure will likely affect your credit score negatively for several years. If the lender successfully sues you to reclaim the deficiency, your credit score could be affected significantly.
7. How Long Does a Foreclosure Affect Your Credit
In general, most Canadians who have gone through foreclosure usually have to wait anywhere between 7 to 10 years before their credit scores no longer reflect a foreclosure or judgment as a result of foreclosure.
To learn more about foreclosures, check out this CTV segment with our Vice President Jasmine Marra as she discusses things to know if you think you may be late on a mortgage payment.
The threat of foreclosure is one of the most stressful situations our clients at Bromwich+Smith deal with. We know it has not been easy, so we are here to help. Bromwich+Smith has helped thousands of families across Canada are in a similar situation.
Licenced Insolvency Trustees, Bromwich+Smith have debt relief specialists available to offer debt advice and debt restructuring entirely from the comfort of your own home. Now offering video appointments with clients, Bromwich+Smith’s Debt Relief Specialists are available for initial free, no obligation, confidential consultation by phone at 1-855-884-9243 or request a call back at contact us page.
Taz is a Community Engagement Partner at Bromwich+Smith and has been in the finance industry for nearly two decades and has always been passionate about education and empowerment.
Having declared bankruptcy herself, she intimately understands the shame, stigma surrounding matters of debt as well as the joy and relief that comes from restructuring. Taz actively works to normalize the conversation of debt through blogs, media interviews, webinars, lunch & learns and through building relationships.