Mortgage 101 – How To Get A Mortgage After Bankruptcy

Clinton Wilkins and Dan Ahlstrand welcome Tina Powell to discuss the misconceptions surrounding bankruptcy and consumer proposals.

Dan Ahlstrand
All right, welcome back to this edition of Mortgage 101. In the studio is our mortgage guru, Clinton Wilkins, and we also have Tina Powell from MNP here, who’s giving us some insight into things that can help you out if you get in a little bit over your head. And we started the conversation in the last segment, Clinton, about the differences between consumer proposals and the difference between that and a bankruptcy. I guess the overarching question Tina is, there’s a lot of, I think, misconception out there about bankruptcy, and what happens when you trigger that? Do you lose your house? Do you lose your car? Do you lose your credit for six years? Have you lost your job?

Tina Powell
Absolutely not. It will have a detrimental effect on your credit rating for a period of time, but it’s like a reset button, and as long as you’re not in default with the secured lender, many people go through consumer proposals and bankruptcies and keep their homes and cars, but they also have to maintain that secured loan outside, yeah, and still make their payments outside of the insolvency proceeding.

Clinton Wilkins
I think that’s really interesting, because I even hear customers come in to see me, and, you know, they’re maybe not in a Good financial position, and you know, we’ve certainly referred customers to your office. And there are so many of these misconceptions out there, and they’re like, Well, I can’t do a bankruptcy because I’m going to lose my house. I’m like, you don’t have any equity in this home. And believe it or not, sometimes it’s people that have just bought a home in the last couple of years, which shocks me, because when we are doing an application, we are doing the stress test, we are obviously checking their credit, checking their income, like they can make this work, but oftentimes something’s changed in their situation. There’s been a change of employment or a loss of employment, there’s been a matrimonial breakdown, there’s been health issues, or there’s been another reason that their finances have been negatively impacted. And I think about some of these folks, and they don’t have any equity in their home. If they bought a home in 2023, you’re not refinancing, let’s be honest. But sometimes things go wrong with the real estate. When you own a home, you have to maintain it, and if something goes wrong, you’re really on the hook for it. So we see consumers that you know, they’ve had misfortunes for a variety of different reasons, and it’s not just financial mismanagement, like there’s been another factor that really has, you know, hurt their finances negatively. But the one thing they always come back to me is that they just assume that they have to dispose of the real estate as part of that bankruptcy. But tell us how a bankruptcy works, because obviously, if you have a lot if you have a lot of equity in the home, you may have to pay back a portion of that real estate if you do want to keep it.

Tina Powell
Exactly, typically, when somebody comes to us, and they own real property, like a home or land or whatnot, we look at we have a market valuation done. We look at an appraisal like we would do if we were doing a refinance, I assume, sure, and we’d look at the equity in there, and we’d also look at their ability to repay that right. And we’d also look at the mortgage or secured loan, whether maybe a line of credit against that, to see if it makes sense, because at the end of the day, if they can’t continue the payments over a long period of time because they’ve got a big life event happening next year or six months down the road. So we do a pretty deep dive into their financial situation and explain to them the merits of what can happen, and often, if there is equity and they have a good, solid cash flow and they can sustain payments, we will consider a consumer proposal to avoid a bankruptcy.

Clinton Wilkins
Because correct me, if I’m wrong, I’m sorry to interrupt, but when you do a proposal, it’s that’s not driven by the assets. You can just keep the assets as they are. It doesn’t matter if you have RRSPs, TFSAs, the consumer proposal. The assets aren’t being taken into consideration as much into consideration as they would be with a bankruptcy.

Tina Powell
No, actually, we look, when we’re doing a consumer proposal versus a bankruptcy, we actually do a comparison. Okay, here’s what creditors will get in a bankruptcy. Here’s what you can offer them in a proposal. Got it, and most often it’s more beneficial. It’s a structured payment for the individual, and it is, overall, a better decision. That’s why consumer proposals have been on the risein Canada over the last few years in Canada. But I do want to add that people do still maintain and keep assets in a bankruptcy, and both scenarios in both scenarios, if there’s equity in that asset, they have to pay that equity into the bankruptcy for the general benefit. In a proposal, basically, we look at their financial situation in comparison to a bankruptcy. And a proposal is kind of to say, leave my income alone, leave my assets alone, leave my creditors alone. I’m making you a formal offer,

Clinton Wilkins
And I’m trying to make you as whole as we can. So like, oftentimes you’re paying either in full or with a proposal. Do you ever just pay a portion? Absolutely, absolutely. So what, like, what’s the norm? You know, when you’re doing a proposal, you know, I always assume a proposal is you pay back 100% bankruptcy. You might only pay back a portion. So with a proposal, you know what percentage of the debt, what’s the average that a consumer would be paying back? Or is that just, it’s too broad?

Tina Powell
It is really. It’s all over the place. It’s a very individual situation. And in a bankruptcy, your payment is based on your income, your family size, and what equity you have in any non-exempt assets.

Clinton Wilkins
So, what is in a bankruptcy, and I know we’re kind of toggling back and forth, but in a bankruptcy, what would be considered exempt and what would be on the table for a trustee to be able to, you know, access that equity?

Tina Powell
In Nova Scotia, exempt assets can include life insurance policies with preferred beneficiaries, and that can be whole life policies, as we often know, which can have value. Our RSPs are exempt, except for any contributions in the 12 months preceding the bankruptcy. Pension plans are exempt. Amounts up to $6,500 are exempt. Medical aids and tools of trade up to $7,500, so there are a lot of assets that cannot be seized by creditors or the trustee.

Clinton Wilkins
That’s very interesting, because I just assumed that everyone you know, when you’re doing a bankruptcy, it’s like you’re starting from scratch, where that’s not really the truth.

Tina Powell
No, it isn’t. And as I said, if there’s a small amount of equity in their home or another asset, we do often allow them to repurchase that. So the money comes into the estate, and it’s distributed on a pro rata basis to their creditors, right?

Clinton Wilkins
So then people would pay it over a 12 or 24-month period.

Tina Powell
Yeah, based on any previous filings with the first time bankruptcy, it’s either nine months or 21 months based on your income. The second bankruptcy is 24 months or 36 months, based on your income. And a third bankruptcy, it’s typically 36 months, plus it could be infinity, especially if it can take longer, so we try, like, to always take a look to see if there’s any possible way we can get a proposal going for them.

Clinton Wilkins
Now I have a really good point, and we talked about this a little bit on the break. Can you get a mortgage once you’ve gone through bankruptcy, and can you get a mortgage once you’ve gone through a consumer proposal? I know that was a question that you really brought up. So tell me, what do your customers what’s the perception do your customers have, Tina, when they come to see you?

Tina Powell
Sure, I have people coming to me, and obviously, they’re in financial distress and they need help and to get back in a good financial comfort zone. And many people will not achieve thatunless theyt come to us and do a formal procedure.

Clinton Wilkins
Like I see some of this debt, this is a forever plan, like I’m talking about. I’m not gonna name any names, but you know, $50,000 unsecured lines of credit, these are never being paid down exactly.

Tina Powell
And one of the comments that I’ve heard over the years is, I don’t want to do a bankruptcy or proposal because I want to get a mortgage. My response is, always, listen. If you don’t deal with your debt and get back on good or in good financial standing, you may never qualify for a mortgage, and Clinton, I’m going to put this question back to you. When somebody comes to you who has previously filed a proposal or a bankruptcy, their tebts been taken care of, what do you tell them?

Clinton Wilkins
As a mortgage broker, I’m like, How can we make a solution here? Because our listeners know, and I think probably most people know, I don’t get paid unless I lend people money, so if I’m in the mortgage lending business, we want to make it work. What we say is, if it’s been a single bankruptcy individual, because the majority of the consumers that we see are single bankrupts, the rule of thumb is to get a prime mortgage. So we’re talking even potentially from a bank lender, like, we’re talking like a prime mortgage, bankrupt and discharged. So, just fully discharge for two years. And we want them to have at least two good trade lines with at least $2,000 as a limit. We don’t want them to have two secured credit cards. That’s not going to really make it work. We really want them to get a new car loan. And we really want them to get a new credit card. Demonstrate. We want them to use it and pay for it. Use it and pay it. Never, ever miss a payment. Zero missed payments, zero collection inquiries. We don’t want any negative history. So it really has to be paid as agreed for a full 24 months. And then someone could even get a CMHC-insured mortgage with as little as 5% down, which is just wild, like it, and just think, like, yes, you might have gone through a challenging time, a bankruptcy.

Tina Powell
We do offer some financial counselling that talks about budgeting, money management, and one thing that some of the content talks about is rebuilding credit and maintaining good payment plans and keeping current on your debt so that you can go out and re-establish credit and rebuild your financial footing.

Clinton Wilkins
You put a really good word out there, re-establish, so that’s one of the big keys. Because I know some consumers through a consumer proposal, and more rarely, but sometimes through a bankruptcy, they do keep some credit products. It could be a car loan, it could be a credit card, but they really need to get new products after that discharge date. So that’s very, very important when we’re talking about a bankruptcy. But one thing you also touched on, Tina, during our kind of interview here is that a consumer proposal is less hard on the credit bureau, and that is 100% true, and that’s from someone who’s lending people money every single day. What happens is, when you do a proposal, it takes a year, sometimes, to pay off these creditors. And the way it works with a proposal, from what we see, is that oftentimes, these creditors freeze the credit bureau at the time the proposal hits, and any negative notations on Equifax and TransUnion, they fall off in Nova Scotia after six years. So in a proposal scenario, oftentimes by by the time a consumer comes to see me, their Bureau is completely clean and clear by the time that we’re even doing an application, sometimes that proposal will still stay on there, because the proposal only stays on for only stays on for two years after the date of discharge, so or one year story after the date of discharge. Tina’s correcting me. So it is a lot easier for us to get a mortgage for someone who has been in a proposal, and we often pay off people who are mid proposal with a refinance. And Tina loves it, so maybe just talk about that quickly before we have to go to break.

Tina Powell
So if somebody is doing a consumer proposal, and at the time they weren’t eligible or didn’t have the means to be able to refinance or whatnot, midway through the proposal, nothing is stopping them from going to get refinanced and accessing some of the equity in their home, and they can use that to pay out the proposal balance. That way, they can get released from the proposal faster, and they’re back on the road to financial freedom. I love it.

Clinton Wilkins
That’s all the time, and oftentimes these refinances are with alternative lenders, which might be at a slightly higher rate, but it puts everybody in a better position. And we can get the position, and we can get these.

Dan Ahlstrand
Creditors paid off early. Tina, if somebody has been listening to this and wants more information, what’s the best way to get in contact?

Tina Powell
You can reach out online at MNPdebt.ca or call us at 310-DEBT.

Dan Ahlstrand
Mortgage 101: Merry Debtmas continues after the break.