In Canada, insolvency refers to a financial state where an individual or a business is unable to meet their debt obligations as they come due. This typically means that the person or company cannot pay their bills or other debts and may owe more than they own in assets.
Types of Insolvency
There are 2 types of insolvency, Personal and Business
Personal Insolvency
This occurs when an individual is unable to repay their debts. The two main legal processes for dealing with personal insolvency in Canada are
- Consumer Proposal
A legally binding agreement arranged by a Licensed Insolvency Trustee (LIT) where the debtor proposes a plan to pay back a portion of their debts over time. This allows individuals to keep their assets, including their home, depending on the terms agreed upon. - Bankruptcy
A legal process where an insolvent individual surrenders their assets to an LIT, who then sells them to pay off creditors. In bankruptcy, certain assets, such as equity in a home up to a provincial limit, may be protected from seizure.
Business Insolvency
For businesses, insolvency can lead to restructuring under the Companies’ Creditors Arrangement Act (CCAA) or filing for bankruptcy under the Bankruptcy and Insolvency Act (BIA).
Insolvency Impact on Mortgages
Insolvency has a significant impact on mortgages.
Consumer Proposal and Mortgages
If you have a mortgage and file a consumer proposal, you can generally keep your home as long as you continue to make your mortgage payments and stay current with property taxes.
However, getting approval for a new mortgage or refinancing can be challenging after filing a consumer proposal because it negatively affects your credit score.
Bankruptcy and Mortgages
During bankruptcy, if you have substantial equity in your home, the Licensed Insolvency Trustee may sell the property to repay creditors. However, if your equity is within the provincial exemption limits, you may keep your home as long as you continue to make mortgage payments.
Post-bankruptcy, obtaining a new mortgage or refinancing becomes difficult, as lenders typically see individuals with a bankruptcy on their record as high-risk borrowers.
Impact on Credit and Future Mortgages
Both a consumer proposal and bankruptcy remain on your credit report for several years (usually three years after completion for a consumer proposal and six years after discharge for bankruptcy).
This can hinder your ability to qualify for new mortgages, and when you do qualify, you may face higher interest rates and stricter lending conditions.
In summary, insolvency in Canada, whether through a consumer proposal or bankruptcy, directly affects a person’s ability to manage their mortgage and future borrowing opportunities. It’s important for individuals facing financial difficulties to seek advice from a Licensed Insolvency Trustee to explore options that best protect their home and financial future.
