What is mortgage foreclosure?
Home ownership is a dream for many Canadians; most of whom will require a mortgage to make the purchase possible. A mortgage is a type of secured, typically long-term, and comparatively low-interest loan that:
- provides borrowers the funds to purchase a home, and
- allows the lender to take actions against the home if the borrower defaults on any of their undertakings (e.g., missed payments).
When you enter into a mortgage agreement, the lender may require several undertakings, including:
- making monthly mortgage payments,
- keeping the property insured,
- paying property taxes and condominium fees, and
- maintaining the property.
Failure to honour any undertakings in the mortgage agreement (i.e., default) will allow the lender to take either power of sale or foreclosure actions against you and your real estate property. While often used interchangeably, these are, in fact, two different legal processes.
Power of sale
In a power of sale process, the lender will serve the homeowner with a notice of default and a timeframe (usually 30 to 40 days) to remedy the default.
If the homeowner fails to remedy the default(s), the lender will file a statement of claim and apply for a writ requiring occupants to vacate the premises and allowing the lender to sell the property. The lender will then have a duty to sell the property for a fair and true market value.
Once the property is sold, the lender will collect the outstanding mortgage balance (plus any costs associated with the power of sale proceedings and sale itself) and provide any remaining funds to the homeowner. If the home sells for less than the amount owing plus associated costs (i.e., shortfall), the homeowner is responsible for paying the difference.
Foreclosure
In the foreclosure process, the lender will serve the homeowner with a notice of default and a timeframe to remedy the default. The lender will then file a Statement of Claim with the court and obtain a court order allowing it to take title on the property.
Once the lender has obtained the property title, it is free to retain ownership or sell the property at its discretion. The lender cannot pursue the borrower for any shortfall that results through a foreclosure, nor will the homeowner receive any surplus funds when the process is complete.
The foreclosure process is more litigious, costlier, and requires a longer time horizon to reach a resolution than the power of sale. It is therefore less common than the power of sale process.
What to do when notified of power of sale or foreclosure actions
You have several options when you begin falling behind on your mortgage payments or are served with a power of sale or foreclosure notice:
- Obtain a second (or third) mortgage to bring the problem mortgage into good standing
- Replace the problem mortgage with a mortgage from another lender
- Sell the property and repay the mortgage
- Consider proceedings with a Licensed Insolvency Trustee, such as a Consumer Proposal or a personal Bankruptcy
Proceedings with a Licensed Insolvency Trustee
MNP provides Free Confidential Consultations with a Licensed Insolvency Trustee to identify the root causes of your financial challenges and discuss the options available to overcome your debt. Depending on your situation and objectives, it’s possible they will recommend Bankruptcy or Consumer Proposal as your fastest, most cost-effective path to resolve a mortgage default.
Consumer Proposal
Consumer Proposals cannot address a mortgage default directly — only your unsecured (i.e., non-mortgage) debt. However, you may find combining all your personal loans, lines of credit, and credit cards into a single, reduced, interest-free monthly payment will help you catch up, and ultimately keep up, with your mortgage payments.
Bankruptcy
Conversely, a personal Bankruptcy applies to all your debts, including your mortgage. In most cases you will release the home back to the mortgage lender, who will then become a creditor in your Bankruptcy. You will be freed from the mortgage debt and will not have any further financial obligations to the lender (including any shortfalls from its eventual sale).
Alternatively, there may be an option to retain ownership of your real estate property in a Bankruptcy by paying a certain amount to the Licensed Insolvency Trustee for the benefit of your creditors. Whether this is possible will depend on the available equity in your property and applicable provincial exemption for real estate property ($0 - $50,000). The Licensed Insolvency Trustee can provide a more detailed assessment of whether such a payment would be possible — and more importantly, advisable — in your situation.
Keep yourself in control
Seek professional advice immediately if you find yourself falling behind on your mortgage payments or are served with a notice of power of sale or foreclosure. The sooner you address the situation, the more options you have to remedy the situation, regain control, and retain ownership of your home.
Reach out to a Licensed Insolvency Trustee, even if you’re certain a Consumer Proposal or Bankruptcy is not the right option for you. They will provide valuable guidance on what lenders can do — along with key considerations to guide your next steps. Initial consultations with MNP are always free of cost, free of commitment, and completely confidential.
