# Does home equity backfire when there is bankruptcy?



## happy_guy (Mar 26, 2016)

Hello, 

I am trying to comprehend the nature of "home equity" and how it relates to bankruptcy.

As I understand, home equity is the portion of your property that you truly “own.” So, for a house with a market value of $200,000, let's suppose I made a $40,000 down payment in order to pay the rest with regular mortgage payments. So, the equity I own is 20%. If the market value suddenly doubles (in my dreams) to $400,000. My equity becomes 60%. 

Sounds good to me. 

But, could it be bad in a case of bankruptcy? It seems, it could. 

I read these harsh lines about a bankruptcy scenario: 
1. "If you do have more equity in your house than you could protect and you can't afford the mortgage payment, you need to sell your house. Period."
2. "If your house has little or no equity, you can usually make an arrangement with the mortgage company to keep paying your mortgage, and keep your house after filing bankruptcy."
3. "If your house has substantial equity, your trustee will seize your house and sell it."

Does it imply that, if I were bankrupted, then I would be in a better situation and more likely to keep my house if I just started paying mortgage than I would be if I were so close to completion with a few more installments of mortgage remaining? Is that how it is?

Your reply would be appreciated. Thanks.

Best Regards,
happy_guy


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## andrewf (Mar 1, 2010)

No. If you declare bankruptcy, you are defaulting on your loans. Either way you are going to have your assets liquidated to cover your debts. In the high equity scenario you are likelier to get some of the money that is left over after your debts are paid.

In practice, people do not tend to default on their loans until they have borrowed as much as they can against their assets. And if you can't afford to stay in your house you are indeed better off selling it than waiting for your debts to pile up and be forced to sell.


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## awesomeame (Nov 15, 2011)

Curious-why not sell the house, give all the leftover cash to say your parents, and then declare bankruptcy. After it all goes through, get the cash back from the parents. Or take it out as physical cash and bury it somewhere, claiming it was spent. 

Matt


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## twa2w (Mar 5, 2016)

Matt, there are stautes that protect against that.
When you declare bankruptcy you have to declare assets that have been sold over the past year and debts paid ( may be more or less- not able to check as on mobile). You then have to say how money was used. What you are counselling for is fraud or fraudulent conveyance. I believe it is also illegal to counsel one to commit fraud. Although I have seen similiar things happen many time either waiting out the time frame or outright lying as you suggest.

To the OP. Yes you are better off in the case of a bankruptcy, if you want to keep your house, to have less equity in it.

If there is little equity, the trustee will not seize the house but refer it back to the mortgagee. The mortgagee( bank) will almost always allow you to keep the house provided you can bring and keep payments up to date. The rest of the bankruptcy will proceed uninterrupted.
If you have lots of equity you may not meet the requirements for personal bankruptcy. If you still do, the trustee will likely still not want to get involved in the house depending on equity. 
The issue is that the house/ mortgagee is secured creditor. If the trustee seizes the house, the trustee has to pay the mortgage or payments until the property is sold. Believe me, unless the house is free and clear or close, the trustee does not want this. Usually at some point in the equity balance, if the other creditors want the equity, the other creditors have to front the money to cover the payments or the mortgage balance in order to have the house sold and the proceeds distributed to other creditors. Unless you have one big creditor this is also not likely to happen. I have seen it happen once though.
Note bankruptcy laws were updated a few years ago IIRC so before you do something, make sure you are aware of your options.


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## sags (May 15, 2010)

Lots of information on bankruptcies and consumer proposals is available on bankruptcy websites.

*If I file for bankruptcy will I lose my home?

*_That depends. If you’re in arrears on your mortgage, bankruptcy does not prevent the mortgagee (bank) from foreclosing on your house. If your payments are up to date, however, your mortgage agreement can continue. To find out if this is an option for you, you’ll need to provide a recent appraisal of your home along with an up-to-date mortgage balance statement so the licensed insolvency trustee can determine the amount of equity you have. To remain in your home, you’ll have to pay the amount of that equity to the trustee for the benefit of your creditors.This equity payment is over and above your surplus income payments and income tax refunds, which you are also required to pay. The trustee will usually register a charge against your home until the equity amount is paid in full.
_
https://doylesalewski.ca/our-services/bankruptcy/


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## twa2w (Mar 5, 2016)

Unless this is something very recent, I have never seen this happen in real life.
Really what recourse would the trustee have if the bankrupt said screw this, I am not going to pay the mortgage. Unless there is big equity as I noted above, the trustee is going to release the house to the bank as they are the secured creditor. The bankrupt can then approach the bank to bring up to date (if in arrears) and keep the house. Even in a bankruptcy the bank has to go through normal power of sale proceedings to take title( unless the bankrupt signs a quit claim). The bank will want to avoid this if possible as well as the possibility of a loss on sale.
This site is also a little misleading IMO as it seems to imply the trustee works on behalf of the bankrupt. From a legal point of view I believe the trustee is to work on behalf of the creditors to maximize the estate.


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