Protecting Your Property: The Pros and Cons of Mortgage Foreclosure vs. Bankruptcy

_{By Bromwich+Smith Staff | 1224 words | Reading Time: 6 minutes | Date: 2024/03/27}

The thought of overwhelming mortgage payments can be overwhelming, but for Canadians suffering from overwhelming debt, having an understanding of what could happen next is crucial for making informed decisions.  If you are having trouble keeping up, foreclosure could be in the cards. Understanding both foreclosure and bankruptcy and their pros and cons is imperative. 

Foreclosure is the legal process in which a lender reclaims the property from a borrower who has failed to adhere to their mortgage payment plan. The goal of the lender is to recover the outstanding balance of the loan by selling the property. Typically, once a homeowner has fallen behind on their mortgage payments, the lender will issue a notice of default and allow the homeowner the opportunity to catch up on missed payments. During this time, it is the lender's responsibility to initiate foreclosure when the homeowner has defaulted on payments. 

Pros and cons of foreclosure for the borrower or homeowner 

Pros: 
* Provides a resolution to the lender for a potentially unstable financial situation. 
* Allows for a fresh start once the process has been completed. 
 
Cons: 
* Will have a significant negative impact on their credit score which may make it challenging to secure credit at preferred rates in the future. 
* Long lasting financial consequences which will affect the borrower’s ability to qualify for credit. 
* Possibility of still owing a balance after the property is sold, which may include costs to foreclose on the property, make it ready, and sell it. 
* Additional emotional stress to the homeowner and their family due to the challenge of finding new living accommodations. 

Pros and cons of foreclosure for the lender 

Pros: 
* Lenders can recover some of the outstanding debt through the sale of the property. 
 
Cons: 
*  There is a possibility of deficiency judgments as the homeowner may be responsible for a remaining balance even after the property is sold. 

Bankruptcy is a federally regulated debt relief option that can only be administered by a Licensed Insolvency Trustee in Canada. While foreclosure is primarily a real estate process focus mainly on repossessing and reselling the property to recover the debt, bankruptcy is a legal process aimed to provide relief from a variety of debts including a mortgage. Both options will have a significant negative impact on the homeowner’s credit score which will make it challenging to secure future credit at preferred credit rates. 

Pros and cons of bankruptcy for the borrower or homeowner 

Pros: 
* Bankruptcy provides the opportunity to discharge additional unsecured debt and provide a fresh financial start. 
* The borrower or homeowner will be granted an automatic stay of proceeding which will prevent all creditors from taking further collection action including wage garnishment or legal proceedings.  
 
Cons: 
* Filing for bankruptcy is a big decision. Bankruptcy is typically seen as the last option when it comes to debt relief programs. It is important to consult with a Licensed Insolvency Trustee in your area to fully understand what is covered under bankruptcy and what is expected of you during this time.  
* Not all debt may be included in bankruptcy.  
* Bankruptcy will have a significant lasting impact on your credit score and will affect your ability to secure immediate credit. You will have the ability to rebuild your credit throughout and immediately after your bankruptcy has been discharged. 

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What is the timeline? 

A foreclosure process will vary by province but is typically done fairly quickly whereas bankruptcy will typically last nine months. It may last longer if the borrower or homeowner has filed before.   

Commonly asked questions during a foreclosure or bankruptcy 

1. Can I stop a foreclosure? 
   
   It is possible to pause a foreclosure process but timely action is important. Consider negotiating with your lender through open communication to explore all options before the foreclosure process begins. This could include a repayment plan or modification to your payment terms. Seek legal advice to identify all options available to you. Filing for bankruptcy will enforce the automatic stay of proceedings which will put a temporary halt legal actions only on unsecured debt which will to allow you time to speak to your Licensed Insolvency Trustee and create a repayment plan. All homeowners have legal rights as do your lenders. Consider speaking to your mortgage provider honestly about your situation as without their cooperation the success of negotiation will be more difficult. 

2. Will I need to continue making mortgage payments during the foreclosure? 
   
   You may be required to continue to make your regular mortgage payments during the foreclosure process until a resolution has been reached by both parties. Options can include loan modification or forbearance which is the temporary pause or reduction of payments which allows homeowners time to address their financial challenge. 

3. How long is the foreclosure process? 
   
   The foreclosure process will vary by province but generally involves 3 stages. Notice of default, which is issued after payment has been missed, pre foreclosure which is time for you to resolve the missed payments, and auction. This last stage can take place at public auction or through private sale and allows the lender the opportunity to sell the property in hopes of reclaiming their loss. We suggest that you consult with legal and financial professionals to understand your rights and explore all options quickly. 

4. How does declaring bankruptcy affect foreclosure? 
   Declaring bankruptcy will have a significant impact on the foreclosure process and will include any shortfalls on mortgage when the property has been sold (now unsecured portion).  

5. How does missing a payment lead to foreclosure? 
   
   Typically a foreclosure begins when a homeowner falls behind on payments and a notice of default is sent out by the lender. 

6. Are there credit implications to missing a payment? 
   Each missed payment will have a negative effect on your credit score. Foreclosure can result in additional financial repercussions. 

7. Can I still live in my house during a foreclosure? 
   As the homeowner you have occupancy rights to remain in the property until the foreclosure process has been completed. Once the property changes ownership the new owner may need to follow legal proceedings to apply for your eviction. You may consider a voluntary departure to avoid the eviction process. 

Strategies to navigate when your lender is selling your home 

Having your lender sell your home is a common outcome in both foreclosure and bankruptcy.  Communicate with your lender to explore alternatives before the property has reached the sale stage this includes being proactive in addressing financial challenges to avoid the need for your lender selling the home.  

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How do I make informed decisions 

If you find yourself in a scenario where foreclosure or bankruptcy is an immediate option, consider seeking professional advice by both legal and financial experts. They will be able to help you understand your rights, explore your options and navigate the months ahead. 
 
Contemplating foreclosure or bankruptcy can be an emotional and stressful time. It is important to seek support through loved ones or a professional counsellor. Develop a plan, including alternative housing options, and look at the bigger picture financial goals you would like to accomplish. Understanding where you would like to be in the future will help focus you on how best to get there. 

You are not alone in this process. Many Canadians struggle with overwhelming debt and look for guidance from professionals. Schedule a call today for a free no obligation consultation with a debt relief specialist. Let's get you back on track today. 

Bromwich+Smith’s Debt Relief Specialists are available by phone at  1.855.884.9243, Live Chat  or you can request a call back at contact us page. We want to see you flourish!   

Related blog:

Seven Things to Know if You are Facing Foreclosure in Canada
When Can You Buy a House Again After Foreclosure?