Have you ever listed a house for a client, only to find out that there are liens registered against the property that will hinder the closing? Or had a client approach you to purchase a house, but they are carrying too much debt to support purchasing their dream home?
The filing of an assignment in bankruptcy or a consumer proposal to deal with debts may enable you to retain a client and complete the sale, or help your client buy a house down the road.
A creditor can issue a Statement of Claim against a debtor and if the debtor does not defend the claim or loses in court, the creditor obtains judgement. The creditor can then file the judgement against real property owned by the debtor and/or garnish wages. Canada Revenue Agency (CRA) has higher rights than other creditors and can garnish wages and pensions and file a lien against real property without issuing a Statement of Claim, and that lien becomes like a mortgage. A property cannot be sold without dealing with writs or liens registered on title.
If there is sufficient equity in the property to pay the registered liens or writs in full, your client’s legal counsel can simply deal with the creditor to pay out the debt on the sale. If there is insufficient equity to pay the lien in full, the debtor may have to look at alternative options to deal with the debt.
An insolvent person can voluntarily file an assignment in bankruptcy that will effectively convert the writ obtained by judgment to an unsecured debt. The trustee could then complete the sale with any joint owners, with the bankrupt’s share of equity being directed to the trustee for the general benefit of his creditors. The benefit to your client is the sale is completed, which doesn’t put him at risk for costs of a failed sale and any joint owner would receive their share of the equity from the sale. If the joint owner did not guarantee, co-sign or jointly sign for the debt, they are not responsible for paying the debt and the judgment is not valid against their share of any equity.
A consumer proposal could also be filed wherein the debtor offers a compromise to his creditors in settlement of his debt. The creditors vote on the proposal and if it is accepted by the required majority, it is binding on all creditors. A term of the proposal could be that the house is sold and the proceeds be paid to the administrator for the general benefit of the creditors under the consumer proposal.
CRA liens must be paid in full unless the licensed insolvency trustee can negotiate with CRA in a bankruptcy or proposal to receive their share of any equity and discharge their lien in order for the sale to be completed. As above, this benefits your client if there are joint owners that are entitled to their share of equity.
If there is no equity in the property after registered mortgages, real estate commissions and legal costs, the trustee will likely not complete a sale and release the property to the mortgage holder. It may be possible for the Realtor to contact the mortgagee to continue with the listing on the mortgagee’s behalf.
There may be instances where your client has over-mortgaged their house and is unable to keep up with the mortgage payments. A bankruptcy or consumer proposal could provide the debtor with relief from the mortgage and the ability to move forward with a fresh start.
An anticipated further bump in interest rates this year will leave many people over-extended and potentially unable to continue to pay their mortgage. Always perform a search for any registered liens/writs before accepting the listing and keep the above ideas in mind for solutions for your clients.
Kathy Lenart is a chartered professional accountant and licensed insolvency trustee with Taylor Leibow. Her experience includes personal and corporate bankruptcies, proposals and restructurings for small to mid-size businesses in a variety of private sectors. Taylor Leibow Inc. currently has offices in Hamilton, Burlington and St. Catharines.
