If a person goes bankrupt, what happens to their house depends largely on the amount of equity in the home compared to the mortgage and local bankruptcy laws. Generally:
- If the home has little or no equity (meaning its market value minus the mortgage is very low or negative), the bankruptcy trustee is unlikely to sell the house. The homeowner can usually keep the home as long as mortgage payments continue. This is because selling the house would not yield meaningful funds for creditors after paying off the mortgage and selling costs.
- If there is significant equity in the home, the bankruptcy trustee can claim that equity to repay creditors. The trustee may sell the home to recover the equity. In some cases, the homeowner could keep the home by paying the trustee the equity amount or by negotiating a payment plan (consumer proposal) to protect the house from sale.
- For joint ownership, only the bankrupt person's share vests with the trustee, and the other owners retain their interest. The home might also face restrictions (like a caveat or bankruptcy restriction) to control transfers until debts are settled.
- In cases of bankruptcy in some regions (e.g., England), the trustee may delay selling the home for up to a few years to allow the bankrupt person time to arrange their affairs, such as planning residence for dependents.
- The key factor is whether there is equity in the property and the ability to maintain mortgage payments. If mortgage payments are not maintained, lenders might foreclose regardless of bankruptcy status.
In summary, bankruptcy does not automatically mean losing the house, especially if the equity is low or payments continue, but significant home equity could lead to its sale to repay debts. Local laws and bankruptcy types also affect outcomes. If more detail is needed about specific legal jurisdiction or bankruptcy types, that can be researched further.
