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What is mortgage foreclosure?

If you fall behind on your mortgage payments, the lender may decide to take you to court. He may decide to sell your home by exercising a right of sale to recover his debt, or become the owner by foreclosure.

In this second option, the lender can obtain an order from the Supreme Court of Canada to take back title to your property. If this happens, all the mortgage payments you have already made, the various amounts invested in the home and the equity in the home will be lost.

The entry process

The entry procedure is lengthy and involves several stages:

• Lender files claim in court
• You have 20 days to respond with a defense.
• When this time limit is exceeded, the mortgage is declared in default of payment.
• Lender applies for a foreclosure order
• If you have a chance of repaying your arrears, the court may issue a redemption order, giving you time to repay.

The repayment period is usually six months. If you are unable to pay on time, your home will be foreclosed and the lender will obtain permission to sell it.

Your room for manoeuvre

If you're able to bring your mortgage payments up to date, you'll be able to stop the foreclosure process. This option is in both your interest and that of the lender, who will be able to recover his money, so finding a plan that suits both parties remains the best solution.

The foreclosure procedure takes between 6 and 10 months, and you should take advantage of this time to find solutions to improve your situation. If you don't act in time, full ownership of the property reverts to the lender and you relinquish all your rights. The owner may decide to do whatever he likes with it, and will probably consider selling it. So it's essential to opt for the best alternatives to help you put an end to the foreclosure procedure.

Foreclosure and power of sale

Foreclosure gives the lender legal title to the property, so all profits from the sale go to the lender. If the house is sold for less than the mortgage balance, the lender records a loss and cannot ask you to pay the shortfall. Given the length of the procedure and the risk of losing money without being able to ask you for the difference, foreclosure is quite rare in Canada.

Power of sale is a process for recovering mortgage arrears. In this procedure, the lender applies to the court for permission for you to vacate the house so that he can sell it. The lender does not have legal ownership, but does have the "power" to sell.

In a power of sale, if there is any money left over after paying the mortgage and fees, it is returned to the owner. And if there is a shortfall, the lender retains the right to sue the borrower to pay it. Foreclosure is rarely used in residential real estate; power of sale is more common.

The differences between foreclosure and bankruptcy

To understand the difference between foreclosure and bankruptcy, you need to distinguish between secured and unsecured debts.

- Unsecured debt: a debt for which you have no collateral (e.g. credit card).

- Secured debt: this is a debt that has a guarantee behind the loan, and your creditors can seize your assets if you don't pay them (e.g. mortgage).

Bankruptcy is an insolvency process that allows you to eliminate your debts and improve your financial situation. This process only includes secured debts.

Foreclosure is a situation in which a lender decides to force the sale of a property because the borrower has failed to repay it. In a foreclosure process, the lender seizes your home to sell it and recover its money.

In Canada, bankruptcy doesn't necessarily mean the loss of your home, but it doesn't stop the foreclosure process either, since the mortgage is a secured debt. Bankruptcy also has a negative impact on your credit rating. Nevertheless, it may enable you to eliminate some of your debts so that you can pay off your mortgage.

The rules are slightly different in each province. Your insolvency trustee will explain what happens to your home and mortgage if you declare bankruptcy, and how declaring bankruptcy can affect foreclosure.

Declare bankruptcy before or after foreclosure?

This is a recurring question: Should bankruptcy be declared before or after foreclosure?

We'll explain the difference between these two situations.

Bankruptcy to prevent foreclosure

Generally, before initiating foreclosure proceedings, the lender will do everything in its power to obtain payment. This gives you time to deal with your financial situation, and bankruptcy can be a solution.

In most cases, if you find yourself unable to pay your mortgage, it's because you're struggling with several other debts. It's a good idea to contact a licensed insolvency trustee to help you solve these problems and improve your financial position.

Bankruptcy proceedings can allow you to eliminate other debts and improve your finances to catch up on mortgage payments. When you file for bankruptcy and can keep mortgage payments current, Canadian bankruptcy and insolvency law protects you.

Indeed, the law stipulates that a mortgagee does not have the right to cancel your loan simply because you have declared bankruptcy or even filed a consumer proposal.

Bankruptcy to deal with mortgage shortages

If the lender decides to apply its power of sale and the house sells for less than the home's equity, it can ask you to pay the difference. When you declare bankruptcy in Canada while your mortgage is underwater, the shortfall between the sale value and the mortgage balance becomes an unsecured debt.

So, in a bankruptcy or consumer proposal when you give up your home, you don't have to pay the deficiency. In the event that your lender forgives the deficiency before you file for bankruptcy, and you are not among the exceptions that will discharge the forgiven debt, the subsequent filing for bankruptcy cannot eliminate your tax debt and you will have to pay taxes. On the other hand, if the lender comes and charges you for the difference, and you then declare bankruptcy, the bankruptcy can erase your deficit debt.

Other measures to combat foreclosure

If you find yourself in a delicate situation that makes you fear losing your home, it's because you're over-indebted. It's important to be aware of all the alternatives and to do everything you can to fight over-indebtedness and keep your property.

1. Request deferred payment

You can always try to renegotiate the mortgage to extend the payment period and lighten the monthly payments. This is a fairly common practice, especially during the economic crisis caused by COVID-19.

2. Find a new source of money

You can also think about finding a new lender if your current one is unwilling to negotiate. Nevertheless, mortgages often come back at very high interest rates. If the foreclosure process has not yet begun, you can try to sell the house yourself, especially if you anticipate a positive net worth from the sale.

3. Submit a consumer proposal

Applying for a consumer proposal may allow you to keep your home. This will reduce your other debt problems, and filing for bankruptcy before foreclosure can improve your financial situation and allow you to bring your mortgage payments up to date.

How will your credit rating be affected?

If you are over-indebted and have filed for bankruptcy or foreclosure, you'll need to manage your credit better. In the case of bankruptcy, you'll have to attend two financial counseling sessions to learn how to use credit and, above all, manage your debts responsibly.

Both procedures have a negative impact on your credit rating. It will then be difficult to obtain a new mortgage in the future unless you can prove to the financiers that you can repay them. However, some good practices can help youimprove your credit rating over time so you can enjoy these privileges again.

To make sure you make the right decisions at the right time, Groupe Serpone offers you a free consultation and guarantees that you will be looked after by a team of experts who will improve your finances.

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