Real-life story – When the Family Home Becomes a Prison

Having been together for a year, Derek and Charlotte decided to buy a house. At first, everything went well, but unfortunately, their relationship began to deteriorate after a few months.

After the holidays, the couple in their early thirties had to face the truth: love had faded away. By March, separation seemed inevitable. But what were they going to do with their house? They purchased the property for $270,000, making the minimum down payment of 5%.

Even though both of them have jobs—Charlotte is a physiotherapist, and Derek is a carpenter—neither of them can afford to pay the full monthly mortgage payment on their own. If one of them moves into an apartment, they won’t have the means to contribute to the mortgage and alleviate the burden on their ex-partner until the property is sold. As a result, the house they desired so much has become a prison…

Choosing the Bank

Charlotte and Derek wonder if they could simply return the keys to the house to their mortgage lender and go their separate ways. To try and find a quick and viable solution, they consulted a financial restructuring specialist. The specialist first assessed their situation.

«They each have a leased car for which they make monthly payments, and they have balances of approximately $2,500 on their respective credit cards. When they moved in, they also took out a $10,000 loan to buy furniture and appliances», explains Pierre Fortin, licensed insolvency trustee and president of Jean Fortin et Associés.

He adds that when a person decides to surrender the keys to their property to their financial institution, the institution has 2 choices. They can take possession of the property as the owner to sell it, and in that case, if they make a profit, they can keep it. However, if they incur a loss, they cannot claim anything from the former owners. That is by far the best solution for Charlotte and Derek.

But the bank can also decide to repossess the house as the mortgage creditor. This means that during the sale, they have to give the profit to the couple, but if they incur a loss, the couple will have to assume it. Unfortunately, the bank has chosen this option, which is much less advantageous for the couple.

Negotiating in Advance

«Taking into account that this is a repossession sale and calculating the brokerage fees and interest costs, we estimated the potential loss for the financial institution to be at least $27,000. Charlotte and Derek are unable to pay this amount», analyzes Pierre Fortin.

Between the delays caused by legal proceedings and the sale of the house, the former partners will likely have to wait for about a year. However, cohabitating during this time is not desirable. The authorized insolvency trustee advised them to file a consumer proposal for their personal debts (credit cards and loan, totaling $15,000), plus the potential loss of $27,000.

«Considering their incomes, we calculated that a proposal of $12,000 each, with 60 monthly payments of $200, was reasonable for their creditors as it was more advantageous than what they would receive in the case of bankruptcy», says Pierre Fortin.

By negotiating in advance and at a discount the loss on the house and their other debts, they have limited the damage. Moreover, by not being obligated to stay in the house and continue paying the mortgage, they were able to turn the page on the past and rebuild their lives more quickly.

ADVICE

• Even if the former partners are on good terms, forced cohabitation can exacerbate things. It is preferable to try to find a quick solution to resolve the situation.
• Today, financial institutions generally opt for repossession as the mortgage creditor. Be cautious: this may result in high costs if you have to bear the losses incurred by the bank during the sale.