# Foreclosure Question



## Loon

Someone close to me is potentially facing some combination of bankrupcy, divorce and default on mortgage. I'm being asked for advice and I don't know what to say. 

If they leave their house for the bank to take, can the bank come after other assets such as RRSP and a rental property? What happens with a HELOC in foreclosure? Is mortgage foreclosure usually followed by bankrupcy?


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## Just a Guy

It depends. If it's CMHC backed, then CMHC can, and has, come after people for the difference between the loan and the sold price. If it's not CMHC backed, then the bank eats the loss. CMHC is insurance for the bank, not the homeowner. I knew someone who was forced to declare bankruptcy after they gave up their house to the bank because CMHC came after them. 

Either way, kiss your credit rating goodbye.


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## birdman

Not entirely correct Just a Guy. Foreclosure, bankruptcy, divorce, and HELOC are all different subjects and way too complicated to address here. However, the laws vary between provinces in regards to foreclosure and in BC the borrower is responsible for any shortfall in the mortgage resulting from the sale of the house. Remember, the mortgage is just the security covering the loan and during a foreclosure the mortgage lender (at least in BC) requests and is granted a judgement against the borrowers for any shortfall on the mortgage after the sale completes. This judgement is against all parties on the mortgage. I am pretty sure this judgement shortfall does not apply in Alta and I don't know about the other provinces. The same would apply to the HELOC as it is really just another loan secured by the mortgage. Yes, if there is a shortfall and the mortgage was CMHC insured the financial institution will get paid and CMHC can come after you for the shortfall (at least in BC).
Now, a judgement is just a legal order that states the debt is real and borrower owes the money. Once the financial institution has a judgement they can attach other assets including a rental property. They simply register the judgement against the property and then if they wish they can start execution proceedings.
In regards to bankruptcy there are strict rules surrounding the matter and I would suggest the services of a "trustee in Bankruptcy" and perhaps a lawyer be obtained. Its been sometime since I was actively involved in these matters but I believe at that time the individual making an "Assignment in Bankruptcy" could only retain personal assets up to a value of perhaps $500. to $1,000. I do not believe RSP's are included and are free from the assignment.
In regards to the RSP's, on occasion the trustee can settle with all the creditors for a small percentage of the shortfall. For example, if the bankrupt has remaining assets of such things as an old car, fishing gear, an atv, and a heavily mortgaged rental property and the total value of these was 20,000. the bankrupt (through his agent) could offer to withdraw some of his RSP's and pay these creditors .10 cents on the dollar an eliminate them having to hire a lawyer and start collection action and perhaps get nothing. There are firms that can settle with creditors but I do not know how they work. 
Google searches on the internet will provide you with lots of information and also the "Bankruptcy Act" which you could also search. 
Hopes this helps and please be advised that I am not a lawyer but just a retired financial executive with some knowledge which could be outdated and should not be relied on. Services of a professional (s) should be obtained and yes, that will cost some $$$.


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## Taraz

Alberta is the only non-recourse province, as far as I know. Even then, you'd still be liable (to the CMHC) for the deficit on a CMHC mortgage.

If you're bankrupt, I'm pretty sure your RRSP and rental property are up for grabs, as well as your cars and any other assets. However, I imagine the mortgage deficit could be included in the bankruptcy. 

Have they tried settling their debts directly with creditors? It sounds like they have assets (RRSPs and a rental property) that they would lose anyways. If credit card debt or other unsecured debt is the issue, why not settle (for pennies on the dollar, if Dave Ramsey is to be believed). 

If they have a negative net worth, then it's probably best to contact a bankruptcy attorney.


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## Just a Guy

With bankruptcy, there are a number of things they can't touch...primary residence, car up to a certain value, etc. (don't remember them all, and hopefully I'll never have to know. I believe rrsps are also protected. Other assets such as rentals are fair game, the heloc may be called in as well...they can't really leave you destitute in bankruptcy, but you're not in a good state for at least 7 years. Also joint stuff is hard to go after, but not out of bounds, separate spousal accounts are fine, as long as they weren't set up or transferred into just before declaring...

As stated, this is a whole long complicated discussion...which should be done with a professional. There are a lot of options to explore before it gets to that point too which may solve the problems before having to declare bankruptcy.


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## Rusty O'Toole

Loon said:


> Someone close to me is potentially facing some combination of bankrupcy, divorce and default on mortgage. I'm being asked for advice and I don't know what to say.
> 
> If they leave their house for the bank to take, can the bank come after other assets such as RRSP and a rental property? What happens with a HELOC in foreclosure? Is mortgage foreclosure usually followed by bankrupcy?


When someone defaults on a mortgage (stops making payments) the lender has the right to sell the house under Power of Sale. They never actually foreclose or own the house, but there is a clause in the mortgage agreement that allows them to sell the property to settle the debt.

If they get enough to pay the debt plus legal expenses plus real estate fees, that is the end of it. If there is change left over, that goes to the borrower. If they come up short, they can come after the borrower for the rest of the money.

If they do that they can get in line behind all the other creditors.

This is usually not followed by bankruptcy. I know people who bought a house, ran it into the ground, and walked away after a few years. Nothing much happened to them because they had no dough, no job and no assets. If you have those things you can be dunned and sued as you would for any other debt.

If the situation is as bad as you say, they would be better off selling the house for whatever they can get. Even if they get nothing out of it for themselves. Bank's legal fees and real estate commissions add up fast and the legal hassle can cripple their credit rating.


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## Westerly

We have a similar situation and here's the basics:
Buddy goes into default for several months and the bank starts foreclosure proceedings. Lawyer is hired by bank (at debtor's cost.) Lawyer gets appraisal that comes in at $280,000. Lawyer goes to court and gets power of sale at $280,000 (cost of lawyer at this point $3,800.) The interest rate and payment that the bank is suing for is not what was actually being paid at 3.5%, it is the non-discounted rate at 4.15% and the higher related payments (cost differential at least $10,000.) Additional lawyer fee if it went through perhaps $3-$4,000.

Buddy has a friend that helps him out, pays up the arrears and the initial lawyer bill with the agreement that the house will be sold. Aprox $10,000 reno work is done to clean the place up, house is listed at $330,000, sold the next day and completed sale at 100% of asking price, less a grand or two for a small repair. Mortgage will be paid out at the original 3.5%.

The direct cost differential to him is approximately $50,000 in what was a hot real estate market. Now, if you throw in divorce and bankruptcy, ...that's a whole other kettle and probably way too many factors to sum up here. You can usually keep a house through bankruptcy, but if you sell it maybe the other creditors can come after the proceeds? not sure. 

One piece of advice, if you can't afford to literally throw the money away, don't be "the friend" that helps out.


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## birdman

In regards to Rusty O'Tooles post it should be understood that the financial institution cannot simply sell the property without going through the courts with the legal costs normally added onto the amount owing. The sequence is something along the following lines:
1. Borrower becomes in arrears
2. F/I (financial institution) sends a letter
3. F/I sends a stronger letter
4. F/i threatens legal action (usually 2 months or thereabouts have now passed)
5. F/I makes a formal demand for payment
6. F/I sends the file to a lawyer
7. Lawyer demands payment
8. Presuming no response, lawyer goes to court with an appraisal and asked the judge for "conduct of sale". Borrower can argue that the house is worth more and judge normally gives the borrower, say 3 months to sell the house on their own.
9. House does not sell and the lawy for the F/I goes back to court asking again for conduct of sale. Borrower opposes again and may be given another period of time to sell the house.
10. Still doesn't sell, layer back in court and the F/I gets conduct of sale
11. Say a month later they F/I gets and offer which the judge presents to the court. The owner says its too low and the judge makes a decision whether or not to allow the F/I to accept it.
12. Another offer comes in and the lawyer for the F/I again asks the judge to accept it and presents a new accounting for the debt and if the offer is insufficient cover all the outstanding legal fees, realtor costs, mtge amount, electric and other costs paid by the F/I, etc. the ask and are normally granted judgement against the owner for the shortfall. After 12 months this could easily eat up 50,000.- $100,000. ????
13. I suggest just process takes 6 -12 months depending on the cooperation or lack thereof by the owner of the property. In complicated cases it could take several years but these are unusual and normally involve larger developments. 

Another option that sometimes comes up is that the borrower "quit claims" the property over to the F/I but if the borrower figures there is any equity they won't do it and similarly, if the F/I feels there is no equity they may not do it. This does not happen very often but perhaps could be brokered through an agent or Bankruptcy trustee. 

One other point. The correct terminology is that you "Make an Assignment in Bankruptcy" and once this is done your financial affairs, etc are more or less turned over to a trustee. The trustee looks after things thereafter and you remain a "bankrupt" until you are "discharged". The trustee asks for this after things are settled but the creditor(s) can oppose the discharge until the borrower meets certain conditions. I personally got stiffed on a second mortgage and the bankrupt did not keep up the house and was a real slob. By the time they got evicted, etc the grass was 3 ft tall and inside work was required. We sold the property through the court without difficulty and we were the only creditor. We opposed the discharge and the judge ordered the borrower to pay us $300. pm for 36 months before he would approve the discharge. He had a good job but just wouldn't pay the 22% on our mortgage. I wonder why?!! Just another lesson learned and no more risky mortgages for me (actually there were 5 of us).
Bankruptcy is something that you cannot do yourself and you will need a liscenced trustee to turn your affairs over to (at a cost). I don't think it would be fun as you will have to start all over.


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## Taraz

Just a Guy said:


> With bankruptcy, there are a number of things they can't touch...primary residence, car up to a certain value, etc. (don't remember them all, and hopefully I'll never have to know. I believe rrsps are also protected. Other assets such as rentals are fair game, the heloc may be called in as well...they can't really leave you destitute in bankruptcy, but you're not in a good state for at least 7 years. Also joint stuff is hard to go after, but not out of bounds, separate spousal accounts are fine, as long as they weren't set up or transferred into just before declaring...
> 
> As stated, this is a whole long complicated discussion...which should be done with a professional. There are a lot of options to explore before it gets to that point too which may solve the problems before having to declare bankruptcy.


They can touch a primary residence, if you have a lot of equity (and if you don't, do you really want to keep it through bankruptcy and divorce)?

Note that bankruptcy tyically does not erase things like student loans, court fines, alimony, spousal/child support, tax bills, etc. With any co-signed loans, they would go after the other party. Also, it's not free - bankruptcy costs money.

If you have very negative net worth, it might make sense. From the sounds of it, this guy isn't broke (unless there's no equity in the other properties). If it's a bunch of credit card debt (and/or crazy spouse problems), the best bet would probably be to negotiate, without declaring bankruptcy. 

When you fight each other in a divorce, the only ones who win are the lawyers.


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## Loon

At the time my brother got married he had a decent net worth split between his residence and rental property, and she came in with nothing. Now, several years later, for a number of reasons, their combined net worth is less than his original net worth. 

The situation is more complicated than I can address here, but when I wrote the OP I thought they had little equity in the new residence and the idea I was entertaining was that he might walk away from it and the marriage rather than attempt to work with her to market the property. It would be a desperate move indeed, although while never having been divorced myself knock on wood, I've seen a number really messy, bitter and drawn out divorces that broke people mentally as well as financially. There is a combination of bad spending habits, physical ailments, mental instability and some drug use at play here, so I don't see it going well at all. 

It turns out they have no CMHC and 30% equity that he can't walk away from. Also, based on all of your feedback here, it sounds like it would haunt him forever. 

Given that her net worth was 0 going in, and his is less than what he started with, what is she entitled to with respect to the matrimonial house? They have to sell it as neither party can afford the full payment or buy the other out.


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## Cal

I am sure that a divorce lawyer would meet with your brother for an hour for no charge to discuss generalizations with him.


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## Four Pillars

Definitely need legal advice. From what I understand, the mat home gets split 50/50 (in Ontario at least), but who knows - it's probably not that simple.

Ignore this forum and get your brother to hire a lawyer. Or hire one for him if you want to help.


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## Taraz

From what you're describing, it doesn't sound like a bankruptcy problem or a foreclosure problem. An agressive divorce lawyer is probably his best option.


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## marina628

My brother lost half his equity in his house even though he use all his money to purchase it before they married but my brother really didn't fight her.


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## birdman

In BC there is new legislation that essentially splits everything 50/50 EXCEPT for whatever you brought into the relationship and subsequent gifts and inheritances. What the new legislation does not address is the income earned on any gifts or inheritances or what happens if you take a gift and apply it on your mortgage. I presume the courts will have to decide this. Seems to be a step in the right direction, at least to my way of thinking. May make it easier to gift assets to your children in the latter part of your life.


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## Karen

The new legislation is not quite that simple, frase. Yes, anything one partner owned before the marriage is not subject to a 50/50 split BUT any increases in value that occurred during the marriage is. So if one partner owned a house worth $150,000 before the marriage and by the time of the divorce, its value had increased to $550,000 (not unusual in BC's crazy real estate market), the difference of $400,000 would be subject to a 50/50 split.

I used those figures in my example because those were the values that applied in my case so I know they're realistic (except that my husband and I were not divorced; he died). But when I married him, my house was valued at $150,000 and 18 years later when he died, it was valued at $550,000.


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## carverman

frase said:


> In BC there is new legislation that essentially splits everything 50/50 EXCEPT for whatever you brought into the relationship and subsequent gifts and inheritances. * What the new legislation does not address is the income earned on any gifts or inheritances or what happens if you take a gift and apply it on your mortgage*. I presume the courts will have to decide this. Seems to be a step in the right direction, at least to my way of thinking. May make it easier to gift assets to your children in the latter part of your life.


This doesn't apply in Ontario divorce courts either. Happened to me. My mother gave me a gift of $25K to help pay down the mortgage on our marital home. At time of divorce, my mother wanted her $25K gift/interest free "loan" back from the sale of the house. She even went to a lawyer and had a letter and proof of what she paid towards the mortgage submitted to the court. Judge disregarded her claim. Proceeds of house was split 50-50. 

The only way to get around this is that all 3 parties go to a lawyer and come up with a contract at the time of the "gift" that is considered legally an interest free loan, 
and all 3 parties agree and sign..otherwise any monetary gifts don't count.


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## carverman

marina628 said:


> My brother lost half his equity in his house even though he use all his money to purchase it before they married but my brother really didn't fight her.


Your brother seems to have just as rough a time in divorce (court) as I did.
Mine lasted 3 days in divorce court.. Fighting over money. In the end, by the time her lawyer and the judges got done with me, I had nothing
left from my share of the marital home..and I had to pay the EX ...pre-judgement interest of 8% on her half of the proceeds of the marital home (over $8K) while the proceeds 
were held in the real estate closing lawyer's escrow account, for which he took a handsome fee for administering it for nearly 4 years, while the legal battle between the lawyers continued.


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## RBull

carverman said:


> Your brother seems to have just as rough a time in divorce (court) as I did.
> Mine lasted 3 days in divorce court.. Fighting over money. In the end, by the time her lawyer and the judges got done with me, I had nothing
> left from my share of the marital home..and I had to pay the EX ...pre-judgement interest of 8% on her half of the proceeds of the marital home (over $8K) while the proceeds
> were held in the real estate closing lawyer's escrow account, for which he took a handsome fee for administering it for nearly 4 years, while the legal battle between the lawyers continued.


That is real shame for you. There are major issues with the judicial process and related costs. 

I experienced it too through an expensive employment suit. Lawyer took a lot of what I received.


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## Loon

Thanks Mike. I definitely wouldn't take actual legal advice on a forum. I'm encouraging him to get a consult but he needs to understand his situation to get the most out of the consult and the subsequent services he will be paying for. For example he needs to know his net worth both prior to cohabitation and now, and a chronology of some recent events. He's trying to put that together. What other info will they require? 

I really want him to have his ducks lined up before he goes to talk to a lawyer. I'm also getting the play by play on a 5+ year divorce that is still playing out. She's 70+, fight over money, there's a language barrier and she's not organized when she sits down with her lawyer. I'd guess that of the well over 30K spent on 2 different lawyers (first one got fed up) at least half of it is due to not communicating the right info to the lawyer and not in a timely manner. To be fair she knew nothing of the legal system going into this but the legal fees have eaten a huge chunk of her retirement savings.


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## birdman

Karen, I agree with you that in BC the increase in value is split 50/50 and similarly if you are gifted some funds and apply it on the mortgage you are probably not going to get it back. In any event, its probably an improvement to what we had and in any event I hope I never go down that road. I'm not that familiar with all the details of the legislation and has been pointed out in several posts legal advice is required and unfortunately, can be costly if things are protracted.


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## MoneyGal

Inheritances and gifts are not subject to the net family property calculation (what the "splitting" of assets is formally called) ONLY if they are kept separate and apart from the family finances. If you take gifted or inherited funds which belong only to you and then put them in a family asset (matrimonial home) you have transformed them from separate assets to "intermingled" assets that are now subject to being split in a divorce.

The new BC legislation does not need to address this as every matrimonial property law in Canada already speaks to this exact scenario.


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## Loon

MoneyGal said:


> If you take gifted or inherited funds which belong only to you and then put them in a family asset (matrimonial home) you have transformed them from separate assets to "intermingled" assets that are now subject to being split in a divorce.


This will come into play in my brothers situation. She moved into his mostly paid-for home a year or 2 before the wedding. Then, they took out a HELOC to make a 30% down payment on the much bigger house which they now live in, and kept the smaller house as a rental. His name is on the rental deed, both of them are on the deed of the big house. 

What is she now entitled to? None of the rental? Half of the 30% downpayment, or half of the proceeds of sale after paying out remaining mortgage?


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## MoneyGal

This is where the concept of "matrimonial home" comes in. The bigger house is the matrimonial home, and she is entitled to 50% of the proceeds of sale. Rental is his asset, and she is entitled to 50% of the gain in value (if any) from the date of marriage to the date of separation. Don't forget to assume real estate costs when you are determining FMV and realized gains on RE assets.


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## MoneyGal

Loon said:


> This will come into play in my brothers situation. She moved into his mostly paid-for home a year or 2 before the wedding. Then, they took out a HELOC to make a 30% down payment on the much bigger house which they now live in, and kept the smaller house as a rental. His name is on the rental deed, both of them are on the deed of the big house.
> 
> What is she now entitled to? None of the rental? Half of the 30% downpayment, or half of the proceeds of sale after paying out remaining mortgage?


FWIW this has nothing to do with funds your brother was gifted or inherited. He took some of his own wealth and transformed it into a marital asset - the one marital asset that must be split equally between the spouses.


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## Loon

MoneyGal said:


> This is where the concept of "matrimonial home" comes in. The bigger house is the matrimonial home, and she is entitled to 50% of the proceeds of sale.


So it is relevant that he put down 30%? Had he put down only 20% he would have been better off, but the extra 10% is now a marital asset, right? 



MoneyGal said:


> Rental is his asset, and she is entitled to 50% of the gain in value (if any) from the date of marriage to the date of separation.


Date of marriage or date of co-habitation? 





MoneyGal said:


> FWIW this has nothing to do with funds your brother was gifted or inherited. He took some of his own wealth and transformed it into a marital asset - the one marital asset that must be split equally between the spouses.


Yes, I was not distinguishing between money gifted to him and money he would have had before meeting her. Thank you for clarifying, and for all the other info as well.


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## MoneyGal

To respond to your questions: 

1. She is entitled to half of the proceeds of sale at FMV of the matrimonial home. This is completely independent of how much he put down. Even if he owned the house outright that they lived in as their matrimonial home, she is entitled to 50% of what the after-sale proceeds would be. 

2. Date of legal marriage. There is no matrimonial home except in a legal marriage.


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## Taraz

In Alberta, there's a program where you can get a neutral lawyer to arbitrate and negotiate the divorce terms face to face in a civil manner. That might be a better option than dragging things out for years and years, assuming you have such a program in your province. If he gives her an extra $50k, but save a $100k in lawyer's fees (not to mention the time in court), wouldn't that be a win?


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## MoneyGal

Divorcing spouses can agree to mediation in any province; you don't need a program, you just need a mediator and the agreement to be subject to the terms of the mediation.


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## Cal

Loon said:


> I really want him to have his ducks lined up before he goes to talk to a lawyer. I'm also getting the play by play on a 5+ year divorce that is still playing out. She's 70+, fight over money, there's a language barrier and she's not organized when she sits down with her lawyer. I'd guess that of the well over 30K spent on 2 different lawyers (first one got fed up) at least half of it is due to not communicating the right info to the lawyer and not in a timely manner. To be fair she knew nothing of the legal system going into this but the legal fees have eaten a huge chunk of her retirement savings.


It is good to be as prepared as possible prior to meeting with the lawyer. When one party does not want to settle it only benefits the lawyers financially. 

In the example above, I am a little surprised they have not gone to court at this point. It would not reflect well on the party that goes to court with their third lawyer throughout the divorce process.


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## Jayme Proctor

*Foreclosure lawyers*

Most people don't understand the Foreclosure Lawyers process and what the bank must do in order to take back ownership of the property. The bank can take back your property in two ways. The bankruptcy filing does not provide the lender a way to recover the property. It must still proceed with one of the two above methods. In some cases, the lender will wait until your bankruptcy case is closed to start or continue the foreclosure process. In other cases, the lender will not wait that long and will file the appropriate paperwork with the bankruptcy court to allow it to take the property out of bankruptcy protection and continue with the sale.Either way, until the property is back in the possession of the bank, you are still the legal owner of the property.


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## dandyrough

Just a Guy said:


> It depends. If it's CMHC backed, then CMHC can, and has, come after people for the difference between the loan and the sold price. If it's not CMHC backed, then the bank eats the loss. CMHC is insurance for the bank, not the homeowner. I knew someone who was forced to declare bankruptcy after they gave up their house to the bank because CMHC came after them.
> 
> Either way, kiss your credit rating goodbye.


It's about time people stopped acting upon assumptions and instead did a little reading of the "mortgage" documents they sign.
Let's get one thing straight. No one can own property in Canada, the Crown or Queen owns the lot. The proof of this is simple - try getting allodial title to your land. It is not possible, you CANNOT own land in Canada. So if you cannot own it, then what is your relationship to the land you think you are buying? the answer is TENANT. You never did buy any property, what you bought was the sellers interest in the property - not the property itself.
Here is a thought, if you are a tenant, not owner, how can you be foreclosed on? You can't. The tenant cannot be punished for the actions of the owner. Here is another thought, If the bank cannot give you a mortgage on the property, how can they foreclose on the owner (not you)?
Answer - They cannot, they never gave you a mortgage on the property in the firstplace.
Read the documents, and stop living in willing ignorance. The transfer form and the lands title registry all state that the person who thought they were a buyer is in actual fact a tenant
www.detaxcanada.org/repub2.htm gives you an insight into this.
www.virconnect.com/bankfraud explains it in some detail


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## carverman

dandyrough said:


> It's about time people stopped acting upon assumptions and instead did a little reading of the "mortgage" documents they sign.
> Let's get one thing straight. No one can own property in Canada, the Crown or Queen owns the lot. The proof of this is simple - try getting allodial title to your land. It is not possible, you CANNOT own land in Canada. So if you cannot own it, then what is your relationship to the land you think you are buying? the answer is TENANT. You never did buy any property, what you bought was the sellers interest in the property - not the property itself.


Yes, I learned this little trivia point from my closing lawyer..he said..'oh yes..about your property..you own the building and the grass (to take care of) but you don't really own the ground
underneath it or mineral rights (if there happens to be gold or oil). 
The Crown; the Queen in Right and her successors (Prince Charles) can move a drilling rig in my back yard and drill for mineral rights (oil or gas) if they want to..
.but he added..
"not that the Queen or Prince Charles is going to knock on your door..but I have to tell you that.." 

He was very anal.


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## Just a Guy

Let me guess, you also don't think it's legal for the government to collect income tax as well since you've read on the internet that it's illegal for them to collect it...

Guess you can just walk into any home that takes your fancy as well, since no one actually owns it...


Just because you think you can twist things around to suite your definitions, doesn't mean society will agree with you.


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## carverman

dandyrough said:


> Answer - They cannot, they never gave you a mortgage on the property in the firstplace.
> The transfer form and the lands title registry all state that the p*erson who thought they were a buyer is in actual fact a tenant*l


The legal term is " joint tenants" or tenants in common" 


> Tenancy in common is a type of shared ownership of property, where each owner owns a share of the property. Unlike in a joint tenancy, these shares can be of unequal size, and can be freely transfered to other owners both during life and via a will.


 I think it goes back to colonial times and the land grants. The Crown intially claimed all the lands in the Dominion of Canada and then land grants were given out after subdividing to people that the Crown favoured for their service to the Crown. 
I am the owner of my house and back yard within the boundaries of the survey...and I can sell it or give it to my heirs if I wish..but the land underneath on which it is built, technically still belongs to the Crown.


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