Devon was covered up in debt due to medical bills and legal problems. For six months, she attempted to pay her monthly minimums, including her mortgage. Devon was considering declaring bankruptcy. She wondered what would happen to her home if she did.
She had heard that a person who files for bankruptcy is released from all verifiable debts. Verifiable, or “provable” debts are ones for which a claim can be made in bankruptcy proceedings.
There are two types of debts Devon needed to consider: unsecured debts and secured debts. When considering the viability of filing for bankruptcy, Devon had only considered unsecured debts. Unsecured debts are not secured by assets. These types of debts include credit cards and personal loans. She knew that unsecured creditors would not be able to repossess items she purchased from the funds advanced to her. She also knew that after filing for bankruptcy the calls would stop and that her unsecured creditors would not be able to attempt to recover debt from her.
While that sounded pretty good, she had not considered secured debts and the other effects that bankruptcy can have. Secured debts are like their name implies, secured by assets. These types of debts entitle the secured creditor to take and sell Devon’s assets if she can’t make payments. A mortgage is a type of secured debt. This means the secured creditor can recover the property and sell it. On top of that, they can file a claim for any loss they incur. If the value of Devon’s home exceeds the amount required to finalise the agreement, the trustee may sell the home during a person’s bankruptcy.
The trustee handles any equity or interest a person has in a property for the benefit of the creditors. This could result in Devon’s house being sold. If Devon’s home was jointly owned, the trustee could sell the interest in her property to the non-bankrupt joint owner. However, Devon is the sole owner.
Devon had previously considered putting the house in her sister’s name so that she wouldn’t lose it, until she was advised by a lawyer that would be a mistake. Trying to circumvent the legal process is a risky proposition. A trustee has the power to void transactions made within a 5 year period prior to the bankruptcy. The trustee will examine the transfer and can recover the home if the purpose of the transfer was to defeat lenders or if the transfer was for less than the fair market value. It can also be recovered if the transfer gave preference to another lender. Transferring ownership of a house prior to declaring bankruptcy, with the clear intent to undermine creditors, is an offence under the Bankruptcy Act.
Under bankruptcy, a secured creditor could sell Devon’s property if she is unable to meet the mortgage repayments. But Devon won’t wind up with money in her pocket, regardless. If a surplus exists following sale, it would be paid to her trustee. Any shortfall would be a debt in her bankruptcy.
Devon opted to not file for bankruptcy as the proposition of losing her home was more than she could bear.
Since Devon has opted to avoid bankruptcy, the following options are available to her:
1. Negotiate with her creditors herself to attempt to reduce her repayments and stay afloat.
2. Talk to a debt administrator like
Debt Relief and allow them to negotiate with her creditors on her behalf. These types of administrators can negotiate informal agreements with creditors concerning her repayments or they can be formalised under a debt agreement.
3. Take out a debt consolidation loan or
mortgage refinance loan with a lender like Mortgage Relief, which will refinance all of her debts under a different repayment schedule that she can handle and at a lower interest rate. This assumes of course that she has eligible for such a loan with the ability to meet future repayments and has sufficient equity in her home.
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