Real-life story – The Family Home Becomes an Unexpected Burden

Derek and Charlotte, together for 1 year now, made the big decision to buy a house together. Initially, things were great, but a few months later, things between them started to get “not so good”.

After a while, reality struck. By March, a separation seemed imminent. The burning question was: what to do with the house, purchased for $390,000 with a minimal initial contribution of 5%?

Despite their professional stability – Charlotte as a physiotherapist and Derek, a carpenter – neither could bear the burden of the monthly mortgage payment alone. The prospect of one moving out and the other staying, while sharing costs, was equally bleak. The house soon became their prison.

The Bank’s Options

When a person decides to hand over the keys to their financial institution, the bank has 2 choices. Take possession as an owner to resell it, and in this case, if it makes a profit, it can keep it. However, if it incurs a loss, it can claim nothing from the former owners. This would have been by far the best solution for Charlotte and Derek.

But the bank can also decide to force a judicial sale of the house. This means that any profit incurred belongs to the couple, but if it suffers a loss, the latter will have to bear it. Unfortunately, this was the option chosen by the bank, significantly less advantageous for the couple.

In search of a solution, they consulted a a personal finance advisor from Jean Fortin who drew a comprehensive picture of their financial situation.

The couple, both with leased cars and about $2,500 in credit card debts each, had also taken out a $10,000 loan to furnish their new home. Pierre Fortin explains that handing over the keys to the financial institution gives it 2 options, each with very different implications for the former owners.

Negotiations and Expectations

Considering the sales and interest charges, as well as the fact that it was a judicial sale, the financial institution’s minimum loss was estimated at $27,000. An amount that Charlotte and Derek could not cover.

For a year, between legal proceedings and the actual sale of the house, the two were forced into tense cohabitation. The trustee advised them to make a consumers proposal for their personal debts and the potential loss.

“Based on their income, a proposal of $12,000 each, spread over 60 monthly payments of $200, was sensible for their creditors and more appealing than bankruptcy“, notes Pierre Fortin.

By negotiating the loss on the house and other debts in advance and at a reduced rate, the duo minimized the damages. They were able to leave the house, thus avoiding continuing to pay the mortgage, and were able to start anew, each on their own.

Advice

• Even in a friendly separation, forced cohabitation can drive anyone crazy. Actively seek quick solutions for a smooth transition.
• Financial institutions tend to opt for judicial sales that tend to yield lower sale prices than if you would have sold the house yourself. Often, a loss is incurred and you are responsible for it.
• Consult professionals before legal proceedings are initiated. Prevention is always better than the best cure.

* Names have been changed to protect the individuals’ anonymity.