Keeping your home and car: equity in a consumer proposal vs bankruptcy
What happens to your house, home equity, mortgage, car loan and leased vehicle in a Canadian consumer proposal or bankruptcy, with a worked equity calculation.
In a consumer proposal you keep your home and car as long as you keep paying the mortgage and car loan, because a proposal deals only with unsecured debt and you keep your assets. In a bankruptcy, the trustee can claim your non-exempt equity: the value of your share of the home, minus the mortgage, selling costs and any exemption your province allows, plus vehicle equity above the provincial vehicle exemption. You can often keep the property by paying the equity to the estate, but if the equity is large that is exactly what a proposal avoids. In the illustrative example below, a homeowner's $32,000 share of equity would be exposed in a bankruptcy, which makes a proposal the obvious choice.
Part of the debt relief worked examples. Figures are illustrative. Not legal advice.
Step 1: work out your equity
| Item | Amount |
|---|---|
| Estimated market value of the home | $520,000 |
| Mortgage balance | −$430,000 |
| Gross equity | $90,000 |
| Estimated selling costs (commission, legal, illustrative 5%) | −$26,000 |
| Realizable equity | $64,000 |
| Owned jointly with a spouse who is not filing: debtor's half | $32,000 |
Trustees typically estimate equity using an appraisal or comparable sales and deduct realistic selling costs. If the home is owned jointly, only the debtor's share is in play, though the trustee may need to deal with the co-owner to realize it.
Does a provincial exemption reduce this? It depends on where you live. Ontario's Execution Act exempts a principal residence only where the equity is no more than $12,997 (O. Reg. 657/05, as amended by O. Reg. 393/25); above that the home is exposed and the Act does not set aside that amount for you, so it rarely helps a homeowner with real equity (confirm with your trustee); some other provinces, notably in Western Canada, protect larger amounts of home equity. See exempt property by province.
Step 2: what bankruptcy would do
Using the example's $32,000 share:
- The trustee has a claim on the $32,000 for creditors.
- You may be able to buy back the equity by paying it to the estate, in a lump sum or over time, sometimes by refinancing.
- If you cannot, the trustee may need to sell or force a sale of the interest, which affects the non-filing spouse too.
- Your mortgage continues; you keep paying it to keep the home.
- The estate would no longer be a summary administration if realizable property exceeds $15,000; trustee fees for an ordinary administration are approved by inspectors and the court.
Step 3: what a proposal would do
A proposal has to offer creditors more than they would get in a bankruptcy. Suppose a bankruptcy would yield the $32,000 equity plus a little surplus income, so after fees perhaps $26,000 for creditors (illustrative). A proposal must beat that, for example $560 a month for 60 months = $33,600. Fixed costs $1,793.17; distributions ($33,600 − $1,793.17) ÷ 1.2 = $26,505.69; after the 5% levy, about $25,180 to creditors, which is too close. A slightly higher offer, say $600 a month ($36,000), would leave about $27,080.
You keep the home, keep paying the mortgage, and pay the proposal from income. You could also offer a lump sum from refinancing, if a lender will approve it.
Use the cost split estimator to test different offers.
Mortgages and secured lines of credit
- First mortgage: keep paying it. It is not part of the proposal or bankruptcy unless the lender chooses to file a claim for a shortfall after a sale.
- HELOC secured on the home: it is secured, so it stays outside, but lenders may freeze the unused limit.
- Mortgage renewal during a proposal: lenders generally renew existing mortgages if payments are current, though rate options can be narrower. Ask the lender.
- Mortgage arrears: a proposal or bankruptcy does not cure them. Secured creditors are not stayed in the same way, so arrears can still lead to power of sale or foreclosure.
Cars: owned, financed and leased
| Situation | Consumer proposal | Bankruptcy |
|---|---|---|
| Owned outright, value within the exemption | Keep | Keep (exempt) |
| Owned outright, value above the exemption | Keep | Excess equity goes to the estate or you buy it back |
| Financed, equity within the exemption | Keep if you keep paying | Keep if you keep paying |
| Financed, little or negative equity | Keep paying, or surrender and include the shortfall | Same; the shortfall is a released unsecured debt |
| Leased | Keep if the lessor agrees and payments stay current | Same; the lease is not your asset |
Illustrative example. In Ontario, a car worth $14,000 with a $9,000 loan has $5,000 of equity, under the $8,578 exemption: it is safe in a bankruptcy if the loan is kept current. A car worth $14,000 with no loan has $5,422 of equity above the exemption, which the trustee could claim.
Should you keep an expensive car?
If the loan payment is high, surrendering the car and including the shortfall in the proposal or bankruptcy may free up more money than keeping it. Compare the payment, the shortfall and the cost of a cheaper replacement. Avoid buying a new vehicle on credit just before filing.
Rental and second properties
Equity in a rental or recreational property is not protected by principal residence exemptions and is normally available to a bankruptcy estate. Rental mortgages count toward the $250,000 consumer proposal limit, because only debts secured by your principal residence are excluded.
Mistakes to avoid
- Transferring the home to a spouse or family member before filing: it can be reversed and can block your discharge.
- Refinancing the home to pay unsecured debt without advice: it turns unsecured debt into secured debt that survives insolvency.
- Ignoring property taxes or insurance: these are conditions of most mortgages.
- Overstating the home's value: get a realistic estimate; it changes the whole comparison.
Related: the size of the equity drives the offer; see sizing a consumer proposal offer, and bring a home value estimate to the first trustee meeting.
Frequently asked questions
Can I sell my home during a consumer proposal?
Yes. The proposal is funded from your payments, not from the home. Selling may let you pay the proposal off early.
My spouse is not filing. Is their share safe?
Their share is theirs, but a sale to realize the debtor's share would affect them. Couples often find a proposal avoids this problem.
Can I buy a house after a proposal or bankruptcy?
Yes, after rebuilding credit. Mortgage lenders and insurers set their own waiting periods; see credit reports.
Does a bankruptcy cancel my car lease?
Not automatically. The lessor can keep the lease running if payments continue, or end it under the lease terms.
Sources
- Justice Laws Website — BIA s. 66.11 (consumer debtor), s. 67 (property of the bankrupt), s. 69.3 (stays and secured creditors)
- Ontario e-Laws — Execution Act s. 2 and O. Reg. 657/05
- Office of the Superintendent of Bankruptcy — what happens to your home in bankruptcy
