Can You Keep Your House with a Consumer Proposal?

Facing overwhelming debt is one of the most stressful experiences a person can endure. When you're buried under high-interest credit card balances, lines of credit, and other unsecured loans, it can feel like you're drowning with no way out. In this situation, a consumer proposal is a powerful legal tool that can provide a path back to financial stability.

But for homeowners in Ontario, this solution comes with a terrifying question: "If I file a consumer proposal, will I lose my house?"

Let's be clear: the entire structure of a consumer proposal is designed to be a viable alternative to bankruptcy, allowing you to get your finances in order while keeping your key assets. So, the short answer is yes, in the vast majority of cases, you can absolutely keep your house.

However, the process has significant and long-term implications for your mortgage. This guide will provide a detailed explanation of how a consumer proposal affects your home, the steps you must take to protect it, and the critical importance of a strategic plan for your next mortgage renewal.

The First Principle: Secured vs. Unsecured Debt

To understand why you can keep your home, you must first understand the fundamental difference between the two main types of debt. A consumer proposal is designed to deal almost exclusively with one of these types.

Unsecured Debts (The Target of the Proposal)

Unsecured debts are loans that are not tied to a specific asset. If you fail to pay, the creditor can't immediately seize a specific item from you. This category includes:

Credit card debt

Unsecured lines of credit

Payday loans

CRA tax debt

Student loans (if you've been out of school for over 7 years)

A consumer proposal is a formal, legal offer made to your unsecured creditors, through a Licensed Insolvency Trustee (LIT), to repay only a portion of what you owe.

Secured Debts (Generally Not Included)

Secured debts are loans that are directly tied to a specific asset, which acts as collateral. If you don't pay, the lender can repossess that asset. The two most common examples are:

Your Mortgage: The loan is secured by your house.

Your Car Loan: The loan is secured by your vehicle.

Your mortgage is a secured debt and is not automatically included in your consumer proposal. The legal agreement you have with your mortgage lender remains separate and intact.

Keeping Your Home: Your Obligations

Because your mortgage is a separate contract, you can keep your home under one simple condition: you must continue to make your regular mortgage payments on time and in full, both during and after your consumer proposal.

As long as you remain current on your mortgage payments, the lender cannot use the fact that you filed a consumer proposal as a reason to foreclose or start a power of sale. Your responsibility is to keep up your end of the mortgage bargain.

The Role of Your Home's Equity

While you can keep your home, the amount of equity you have in it plays a crucial role in the proposal itself. The LIT must calculate the amount of "non-exempt" equity you have. In Ontario, there is no specific exemption amount for home equity as there is in other provinces.

Essentially, the offer you make to your unsecured creditors must be greater than what they would receive if you were to declare bankruptcy and your assets were liquidated. This means the amount of equity in your home will be a key factor in determining a fair and acceptable monthly payment for your proposal. Your LIT will guide you through this calculation.

The Real Challenge: Your Next Mortgage Renewal

Successfully filing your proposal and keeping up with your mortgage payments is the first half of the battle. The second, and often more challenging, part comes when your current mortgage term expires and you need to renew your mortgage.

Why Your Current Bank Might Say No

Filing a consumer proposal will have a significant negative impact on your credit score, lowering it to an "R7" or "R9" rating. This rating will remain on your credit report for three years after your final proposal payment is made.

When your mortgage term matures, your current 'A' lender (your bank) will likely check your credit again. When they see the consumer proposal, they may view you as a higher risk than when you first got the mortgage. While some banks will offer a simple renewal out of convenience (often at a non-competitive rate), many will use this as an opportunity to decline your renewal. They are not obligated to continue their relationship with you after your term is complete.

This is where many homeowners face a new crisis: their mortgage is due, their bank won't renew it, and they need to find a new lender willing to approve them while the consumer proposal is still on their credit report.

A Broker's Solution: The Post-Proposal Mortgage Plan

This is a situation where a mortgage broker's expertise is not just helpful—it's essential. The big banks may say no, but we have access to a wide range of alternative lenders who specialize in helping homeowners in this exact situation.

The 'B' Lender Renewal

The primary solution for a post-proposal mortgage renewal is the Subprime ('B') Lender market. B-lenders are regulated financial institutions whose entire business model is built around "common-sense" underwriting for clients with bruised credit.

Their Expertise: They are experts at assessing files for clients who have successfully completed or are even still in a consumer proposal.

What They Want to See: They will want to see that you have a good down payment (or in this case, significant equity in your home), stable and provable income, and a history of perfect payments on your mortgage and your proposal.

The Goal: A B-lender provides the crucial financing needed to pay off your old lender and keep your home. We typically structure this as a short-term (1-3 year) solution. This gives you the time you need for the consumer proposal to eventually fall off your credit report, at which point we can move you back up to a prime 'A' lender with the best rates.

The Private Lender Option

In more complex situations, or if you need to access additional equity during your proposal, a Private Lender may be a strategic option. As asset-based lenders, their decision is based on your home's equity, not your credit score, making them a flexible source of short-term funding.

Your Path to a Secure Future

A consumer proposal is a powerful tool designed to give you a fresh start, not to make you lose your home. It effectively deals with your unsecured debts while leaving your mortgage intact. The key to long-term success is to maintain perfect payment history on your mortgage and to have a proactive plan in place for your renewal.

A "no" from your bank at renewal time is not a dead end. It is a predictable challenge that can be overcome with the right expert guidance. By working with a mortgage broker who understands the alternative lending market, you can secure the financing you need to keep your home and continue on your path to becoming completely debt-free.

If you are considering a consumer proposal or are worried about an upcoming mortgage renewal, contact our brokerage today. We can provide a confidential review of your situation and build a clear, strategic plan to protect your home.

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