Power of Sale During a Consumer Proposal or Bankruptcy in Ontario

If you have filed a consumer proposal or bankruptcy, or you are thinking about it, and you have also received a power of sale notice on your home, you are probably wondering whether one process stops the other. It is a common worry, and the answer is often not the one people hope for.

This article explains in plain language how secured creditors such as mortgage lenders are generally treated, which notice rules apply to a home mortgage, and what options may remain. It is general information, not advice on your file. The details of your situation matter a great deal.

Why insolvency does not automatically stop a power of sale

A mortgage is a secured debt. That means the lender has a claim against your home itself, not just against you personally. The insolvency system generally treats secured creditors differently from unsecured ones such as credit card companies.

Under the Bankruptcy and Insolvency Act, the bankruptcy of a debtor does not prevent a secured creditor from realizing or otherwise dealing with its security, although a court may order otherwise, subject to the Act's limits on postponement. In the same way, filing a consumer proposal does not prevent a secured creditor from realizing or dealing with its security unless the court orders otherwise.

In practical terms, this means a lender that has started a power of sale may be able to keep going even though you have filed. Whether it does, and what a court might order, depends on the facts.

Which notice rules apply to a home mortgage

People sometimes hear about a 10-day notice under the Bankruptcy and Insolvency Act. That rule applies to a secured creditor enforcing security on all or substantially all of an insolvent person's inventory, receivables or other property acquired for or used in a business. It does not apply to an ordinary home mortgage.

For a home mortgage, the timing comes from Ontario's Mortgages Act. Where the mortgage contains a power of sale, the lender may sell once you have been in default for at least 15 days and at least 35 days' notice has been given to everyone with an interest in the property. If the mortgage has no power of sale clause, the statutory power of sale applies, after three months of default and 45 days' notice to interested persons.

The prescribed form for the notice of sale under s. 31(1) is Form 1, Notice of Sale under Mortgage. If you have received a document like this, keep it and note the date you received it.

How a court can get involved

The statute leaves room for a court to step in. A creditor affected by the stays in ss. 69 to 69.31 of the Bankruptcy and Insolvency Act can ask the court for a declaration that the stay no longer operates for it. The court may grant it if the creditor is likely to be materially prejudiced by the stay continuing, or if it is equitable on other grounds.

There is also a timing point for proposals that begin with a notice of intention. A notice of intention stay does not stop a secured creditor that gave a s. 244(1) notice more than ten days before the notice of intention was filed. Because that section is aimed at business assets, whether it matters in a home situation depends on the facts, and a Licensed Insolvency Trustee or lawyer can confirm.

What a consumer proposal can and cannot do for your home

A consumer proposal is available where total debts do not exceed $250,000, not counting a mortgage on the principal residence. The term cannot exceed five years, and the debtor keeps assets provided payments to secured creditors are made.

That last point is important. A proposal generally deals with your unsecured debts. Your mortgage still has to be paid, and falling behind on it can still lead to enforcement. A proposal may reduce pressure from other debts, which can free up money to catch up on the mortgage, but it is not a substitute for dealing with the arrears.

• Ask a Licensed Insolvency Trustee how your mortgage arrears would be treated alongside the rest of your debts.
• Ask whether your plan realistically allows you to keep up regular mortgage payments.
• Ask a lawyer whether any step in the power of sale process can be challenged or whether time can be negotiated.

Money, surplus and credit consequences

If a power of sale goes ahead, the proceeds go first to the principal and interest owed to the lender, the expenses of the sale, and other encumbrances in order of priority. Any remaining surplus goes to the mortgagor. If you have built up equity, selling on your own terms before the lender sells may leave you with more than a forced sale would.

Insolvency filings also stay on your credit report for a time. A consumer proposal is removed 3 years after all included debts are paid, or 6 years after signing, whichever comes first. Bankruptcy is usually removed 6 years after discharge (TransUnion: 7 years in Ontario), and a repeat bankruptcy stays 14 years. These are bureau practices summarized by the Financial Consumer Agency of Canada and can vary.

What to do next

• Gather the notice of sale, your mortgage, recent statements and any court papers.
• Write down the date you were served and the date of your first missed payment.
• Book a meeting with a Licensed Insolvency Trustee about your overall debts.
• Speak with a real estate lawyer about the power of sale timeline before any deadline passes.
• Ask whether refinancing, a private sale or a negotiated payment plan is realistic given your equity.

Do not ignore the notice. Timelines run whether or not you respond, and options narrow as the sale gets closer.

Frequently asked questions