As a consumer proposal administrator I meet with a lot of Canadians that own a home, and they are considering filing a consumer proposal. In many cases they can’t afford to keep the home, so they want to know if they should surrender the house back to the mortgage company before filing their proposal.
Here’s my answer: There are many factors to consider when determining whether or not you should surrender your home prior to filing a consumer proposal.
The two most important factors are:
- Can you afford to make the monthly payments on the house? and
- Is there equity in the house?
I meet with a lot of people who refinanced their house, so now they have a first and second mortgage, so they have high payments each month. When you add in property taxes and maintenance costs the monthly cost of the home may not be affordable. If you can’t comfortably make the monthly payments, you should consider finding a less expensive place to live.
The other factor is house equity. Equity is the amount of money you would get if you sold your house. It’s the selling price, less real estate commissions, outstanding property taxes, legal fees, and the cost to pay off the mortgage, including any penalties and fees for breaking the mortgage early. If you have negative equity, you should consider surrendering the house prior to filing your consumer proposal.
Here’s the process:
- Get a real estate agent to give you a written appraisal, or comparative market assessment, on your house. You want a realistic selling price, as is, not an inflated price if you were to paint the house and do repairs. Most real estate agents will do the appraisal for free.
- Get a pay-out amount from your mortgage company, including any penalties for early payment.
- Find out from the city if any property taxes are owing.
- Using those three numbers calculate the equity in your house. If it is low or negative, you will probably want to consider stopping your mortgage payments, and then using the savings to save up for first and last month’s rent and moving expenses.
- Once you find a place to rent and move out of your house, you can file your proposal. Because you have stopped making mortgage payments and have moved out of the house, any future shortfall can be included in your proposal.
In my experience this is a very scary decision for most people. You are afraid to leave your home, and you don’t know what will happen. So, before you make this decision, book a no charge consultation with a consumer proposal administrator, licensed by the federal government, and they will explain the process in detail.