Selling your house to pay off debt: before, during or after a consumer proposal
A guide in the Mortgage Trouble centre
Compare the money a sale could leave, the cost of your next home and the debts that would remain before deciding to sell.
Selling may clear your debts, leave a balance still owing or release money you need for your next home. Before deciding, calculate the net proceeds and compare the monthly cost of staying with the cost of moving.
If you are considering a consumer proposal, or already have one, speak with the trustee before listing. The timing, your proposal’s terms and what you do with the proceeds can matter as much as the sale price.
A consumer proposal does not transfer ownership of your home to the trustee. That does not mean you can assume all sale proceeds are yours to spend. Have the terms and your circumstances checked first.
Put these figures together before you list
- A realistic sale-price range, with the date and source of the estimate.
- Current payout statements for every mortgage, including applicable penalties and discharge charges.
- Written estimates of commission, tax, legal, moving and repair costs.
- All other debt balances and their payments.
- The cost of your next home, including utilities and insurance.
- If a proposal is running, its terms and the administrator’s written explanation of how a sale would be treated.
Check what each payout statement includes so you do not deduct arrears or fees twice. If the proceeds will not clear every mortgage, involve the affected lenders and closing lawyer before accepting an offer.
Should you sell your house to pay off debt?
Debt alone does not answer the question. The home may still be affordable if there is a workable way to address unsecured debt. Alternatively, the housing payment itself may be too high, or a move may be right for family or work reasons.
This hypothetical sale shows why the headline equity figure is not the amount you can spend.
| Item | Amount |
|---|---|
| Sale price | $900,000 |
| Mortgage balance | ($600,000) |
| Illustrated selling and moving costs | ($62,020) |
| Net proceeds before unsecured debt | $237,980 |
| Unsecured debt paid | ($80,000) |
| Amount remaining | $157,980 |
The assumed $62,020 costs comprise $45,000 commission, $5,850 tax on commission, $5,910 interest penalty, $2,000 legal fee, $260 tax on that fee, $300 discharge registration and $2,700 moving costs. The interest illustration is three months on $600,000 at 3.94% a year. These are example inputs, not quotes or a prediction of your mortgage penalty. Replace them with actual payout figures and written estimates.
Then compare the monthly alternatives. A $600,000 mortgage over 25 years at an illustrated fixed rate of 3.94% is about $3,137 a month, using semi-annual compounding. That is the mortgage payment only. Add property tax, insurance, utilities, maintenance and any condo fees.
Illustrated rent of $3,200 a month totals $115,200 over three years if unchanged. That excludes utilities and tenant insurance. Do not compare it with the mortgage alone and call the difference a saving. Mortgage payments include principal that can build equity; moving costs, property values and the rest of the budget also affect the result.
If the $80,000 debt has a minimum payment of 3% of the balance, it requires $2,400 a month initially. If an insolvency assessment identifies an available proposal, compare its proposed payment with the payments it would replace. Keep all other expenses in the calculation.
Home equity affects the proposal assessment
A consumer proposal is not available simply because you would prefer lower payments. A Licensed Insolvency Trustee must assess whether you are insolvent and whether the route fits your situation.
Creditors compare the proposed offer with what they could receive in a bankruptcy. Your share of home equity matters to that comparison. A household with substantial equity cannot assume the same proposal payment as a household with none.
The trustee must assess what equity would be available to creditors, including applicable exemptions. See How a consumer proposal payment is calculated. These example figures do not establish eligibility or an affordable payment.
Selling before filing: get advice about the proceeds
A sale before filing is not automatically a problem. The important questions are what the property was worth, what you received and where the money went.
Proceeds still in your account form part of the financial position the trustee assesses. Bankruptcy and a proposal treat assets differently. Do not assume that converting the home into cash protects the value from creditors.
Before making payments or transfers, discuss:
- Paying one creditor ahead of others. A payment that favours a creditor before filing may be challenged. Family loans require particular care.
- Giving money or property away. Gifts and transfers for less than fair value can be examined and may be reversed.
- Selling to a relative. Get advice about value, documentation and the proposed transaction before committing.
- Using the proceeds for living costs. Explain the intended budget and keep records rather than assuming every use of the money will be treated the same way.
A proposal does not itself reverse every earlier payment. Those transactions can nevertheless affect the assessment, the offer to creditors and the consequences if a bankruptcy follows. Disclose them fully. Do not move assets or repay family first in an attempt to put money beyond creditors’ reach.
Selling during a consumer proposal
Read the proposal and speak with its administrator before listing. Some proposals require consent to a sale or direct a specified amount of the net equity into the proposal. Others do not expressly address a sale.
If the terms are silent, do not guess what that means for the proceeds. Ask the administrator to explain the applicable terms and whether a proposed change would require an amendment. A higher sale value than the amount used when the proposal was prepared may also raise questions.
Get clear answers to three practical questions:
- Is consent needed before the sale, and what must the closing lawyer receive?
- How much, if any, of the net proceeds must be paid into the proposal?
- If you want to use proceeds to complete the proposal early, what do its terms require?
The answer should come from your actual proposal and assessment, not from a general promise that all equity goes to creditors or that all of it stays with you.
Selling after the proposal is completed
Confirm completion with the certificate of full performance. Then plan the sale and next home with the usual mortgage payouts, closing costs and financing requirements in view.
Completing a proposal does not promise approval for another mortgage. If you plan to buy again, ask a licensed mortgage professional, such as a mortgage broker or agent, about your current file and read Mortgages and a Consumer Proposal and the credit guide.
What if the sale will not clear the mortgages?
A sale price below the mortgage payouts creates another problem: the mortgages cannot simply be paid off from the proceeds. The affected lenders and your closing lawyer must be involved in arranging the releases needed for the sale to close.
Do not assume that a lender will discharge its mortgage for less than it is owed. If it agrees, the unpaid balance does not automatically disappear. In Ontario, a lender may pursue a borrower personally for a shortfall.
An insolvency proceeding may address that unsecured balance. A shortfall from a later sale may also fall within an existing proceeding where the mortgage obligation existed when it began. Ask the trustee how your mortgage, sale and filing dates fit together before treating the balance as either settled or outside the proposal.
For the carrying-cost decision, read The condo that no longer pays for itself. For lender enforcement, see Power of Sale in Ontario.
Can you keep the home instead?
A consumer proposal does not itself transfer the home to the trustee. Keeping it still requires a workable budget, continued mortgage obligations and an acceptable proposal. Equity affects the offer, and a lender’s renewal decision remains a separate question.
Compare staying and selling before committing. House poor at $6,000 a month walks through the budget test.
For an assessment of your Ontario debt situation, contact Paul Franchi, Licensed Insolvency Trustee, or leave a voicemail at 647-492-9283. Bring your mortgage payouts, likely sale price, debt balances and any existing proposal.
Explore the other guides in the Mortgage Trouble centre. This page is general information, not advice about your sale, proposal or use of proceeds.
Questions about your home and your debt?
Tell Paul what has changed and which decision you are facing.
647-492-9283 (voicemail)
Compare the full cost of keeping the home with what the household can actually afford.
