In Canada, a borrower's failure to make payments results in legal actions such as bankruptcy and mortgage foreclosure. Both times, the borrower gives up assets to pay off obligations. But that is the extent of their commonalities. Bankruptcy You can lawfully discharge your debt through bankruptcy, an insolvency procedure that is governed by the government. You must transfer your assets to an appointed Licensed Insolvency Trustee, who arranges the distribution of funds to your creditors. It's crucial to keep in mind that bankruptcy only effectively discharges the unsecured debt or debt for which you haven't provided any collateral. Credit cards, lines of credit, and personal loans are a few examples of unsecured debt instruments. Financial Foreclosure When you stop paying your mortgage payments, your lender has the right to seize your house through a mortgage foreclosure. After taking possession of your property, the lender may rent it out or sell it to recoup their losses. Your home serves as security for your mortgage, which is a type of secured debt as opposed to a credit card or personal loan. In the event of a default, this feature adds an additional degree of financial security for your lender. They can quickly sell your home and get the money instead of garnishing your wages to pay the unpaid balance. Mortgages are secured debts, so bankruptcy cannot be used to get rid of them. Your home would consequently still be at risk of foreclosure. The Canadian foreclosure process for mortgages Your mortgage lender may file a lawsuit against you if you repeatedly skip payments. If the judge rules in their favor, they will be able to seize the title to your home, making it clear that they are now the rightful owners. The following steps make up the foreclosure procedure: Step 1: You have 20 days to contest the claim that your lender will submit to the court. Step 2: The court will consider your mortgage to be in default if you don't present a solid defense in response within 20 days. Step 3: Your lender will request a foreclosure from the court. Step 4: Through the issuing of a Redemption Order, the court will give you a fixed amount of time to make up your missed payments. Generally speaking, you have up to six months to bring your mortgage account current; however, you may request a longer period from the court. It can take between six and ten months to finish the lengthy and complicated process of foreclosure. How declaring bankruptcy will impact your capacity to maintain your house A mortgage is a secured loan, as was already established, hence it cannot be discharged in bankruptcy. You must continue to pay your debt or risk foreclosure. That does not, however, imply that your mortgage lender has complete control over your home. Bankruptcy filing does not immediately give your lender the right to revoke your mortgage agreement. Canada's bankruptcy laws expressly forbid them from doing so. As long as you keep up with your mortgage payments, you have the right to remain in your home. You won't have any unsecured debt left over when the bankruptcy process is over, which will allow you to resume paying your mortgage. You'll have more money available to put toward mortgage payments if you have less debt. As a consequence, both you and your mortgage lender benefit. Home equity: exempt vs. non-exempt If you declare bankruptcy, you could have to give up some of the equity in your home in order to keep possession of it. According to Canadian bankruptcy law, there are two types of home equity: The portion of the equity that is exempt from creditors Non-exempt equity is the component that creditors can access. Your Licensed Insolvency Trustee will need to receive the cash equivalent of your non-exempt home equity. They will distribute these cash to your creditors in order to pay off your unpaid obligation. In a bankruptcy procedure, different amounts of home equity are protected from creditors depending on the province or territory. For instance, the barrier in Ontario is $10,000. If your home equity is greater than this sum, you must pay the non-exempt portion; otherwise, your property may be legally seized by your creditors. What occurs if you surrender your house after filing for bankruptcy? Let's say your situation is so bad that you choose to surrender your house to your mortgage lender. Are you no longer obligated to pay them money in the future? Yes, it is the answer. The lender is now in charge of your house, and they take on all the associated risks. Suppose your lender makes a loss upon selling the house. They cannot file a lawsuit against you in that situation to obtain the difference between the mortgage debt and sales proceeds. Although a foreclosure transfers all financial risk to your mortgage lender, you may still be responsible for paying back debts. You could still be the target of legal action by the mortgage insurance (if the mortgage was insured).