In Canada, you cannot simply stop paying your mortgage and walk away from the debt without significant financial and legal consequences. While you might physically leave the property, the obligation to repay the outstanding amount remains, whether it's to the lender or the mortgage default insurance company. However, there are specific legal processes, such as filing a consumer proposal or bankruptcy, that can ultimately allow you to be discharged from your mortgage debt.
What Happens if You Simply Stop Payments?
If you decide to cease making mortgage payments without engaging in a legal process, you will default on your loan. This initiates a serious chain of events with lasting negative impacts:
- Foreclosure or Power of Sale: Your lender will begin legal proceedings to take possession of your home. In most Canadian provinces, this is typically through a "Power of Sale" or "Foreclosure," allowing the lender to sell the property to recover their losses.
- Deficiency Judgment: If the sale price of your home does not cover the full outstanding mortgage amount, including interest, legal fees, and other costs, you will still be responsible for the difference, known as a "deficiency." The lender can pursue you for this remaining debt.
- Damage to Credit Score: Defaulting on a mortgage will severely damage your credit rating, making it extremely difficult to obtain future loans, credit cards, or even rental agreements for many years.
- Collection Efforts: The lender or a collections agency will pursue you aggressively for the outstanding debt.
Legal Avenues to Be Discharged From Mortgage Debt
While simply walking away is not an option without severe repercussions, homeowners in Canada may find pathways to discharge their home loan obligations through formal insolvency processes.
1. Consumer Proposal
A consumer proposal is a legal agreement between you and your creditors to repay a portion of your debts over a period of up to five years. It is administered by a Licensed Insolvency Trustee (LIT).
- How it works: You offer to pay back a percentage of what you owe, or extend the time you have to pay back the debt. If your creditors accept the proposal, you are legally bound by its terms, and upon successful completion, your included debts, including the mortgage deficiency (if the home has been sold), are considered paid in full.
- Impact on Mortgage: If you are unable to keep your home, any remaining mortgage deficiency after the sale can be included in a consumer proposal, allowing you to settle it for a reduced amount.
- Credit Impact: A consumer proposal will negatively impact your credit score but is generally less severe than bankruptcy.
For more details on consumer proposals, you can visit the Office of the Superintendent of Bankruptcy Canada (OSB) website.
2. Bankruptcy
Bankruptcy is a legal process where a person is declared insolvent and their assets (with some exceptions) are distributed among their creditors. It is typically a last resort for individuals who cannot meet their financial obligations.
- How it works: Administered by an LIT, bankruptcy liquidates your non-exempt assets to pay your creditors. Once declared bankrupt, most of your unsecured debts, including any outstanding mortgage deficiency after your home has been sold by the lender, are typically discharged upon the completion of your bankruptcy duties.
- Impact on Mortgage: If your home is sold (either by you or through foreclosure), any outstanding deficiency remaining on the mortgage can be eliminated through bankruptcy.
- Credit Impact: Bankruptcy has the most severe and longest-lasting negative impact on your credit score, remaining on your credit report for 7 to 10 years depending on the province and whether it's a first or subsequent bankruptcy.
- Asset Liquidation: You will likely lose non-exempt assets, which may include equity in your home if it's not already subject to foreclosure.
For further information on bankruptcy, refer to the OSB's guide to bankruptcy.
Comparing the Outcomes
Here's a simplified overview of the outcomes concerning the mortgage debt obligation and credit impact:
| Action Taken | Debt Obligation After Property Sale | Credit Impact | Other Major Considerations |
|---|---|---|---|
| Simply Stop Payments | Still Owed (Deficiency) | Severe Negative (R9 credit rating, collections) | Foreclosure, potential lawsuits, ongoing stress |
| Consumer Proposal | Can be Discharged/Reduced | Significant Negative (R7 credit rating) | Negotiated repayment over time, avoids full bankruptcy |
| Bankruptcy | Typically Discharged | Most Severe Negative (R9, 7-10 years on report) | Asset liquidation (non-exempt), court involvement likely |
While you cannot "walk away" from your Canadian mortgage scot-free by simply stopping payments, formal insolvency options like consumer proposals or bankruptcy provide legal frameworks to eventually be discharged from the outstanding mortgage debt, albeit with significant consequences for your financial future and credit standing.
