Why Now Might Be the Right Time to Walk Away from Real Estate Investments
Real estate is increasingly pushing Canadians over the edge financially, with bankruptcy becoming a more common consideration for homeowners and condo investors facing underwater properties. According to financial experts, there comes a moment when throwing in the towel on an investment might be the most prudent financial decision.
The Reality of Balance-Sheet Insolvency
Douglas Hoyes, a licensed insolvency trustee and co-founder of Hoyes, Michalos & Associates Inc., explains that the technical answer for when to consider bankruptcy often comes down to facing the reality of being balance-sheet insolvent. This means having more liabilities than assets, a situation many Canadians are encountering with declining property values.
"I have a house that I paid $1 million for and it's worth $800,000. I hear this every day. It's bad out there," Hoyes said. "The question becomes, 'Should I pull the trigger?'"
Cash Flow Considerations and Mortgage Affordability
Hoyes starts by examining cash flow situations. If you've recently renewed your mortgage and can afford the payments, does the current market value of your home matter if you have no immediate plans to sell? However, affordability is a relative term that requires careful evaluation.
Monthly payments might seem manageable, but if they're based on very long amortization periods, homeowners need to ask themselves: What's the point? This is particularly relevant for those in variable-rate mortgage products where interest rates could rise unexpectedly.
"It's a bit like an eight-year car loan, where you ask, 'What are you thinking?'" Hoyes noted. "Hey, but I have had my car for 15 years because I'm a cheapo, so I get seven more years after making the payments."
Rising Insolvency Rates Among Homeowners
Recent studies reveal troubling trends. Hoyes found that homeowners accounted for eight percent of all insolvencies in 2025, up from just five percent in 2024. This significant increase highlights how real estate investments are becoming riskier propositions for many Canadians.
Paying down your mortgage while waiting for an $800,000 home to reach $1 million again might not make financial sense when factoring in interest costs and opportunity costs. However, there are important considerations before making any drastic decisions.
Legal and Financial Implications of Bankruptcy
- Non-Recourse Limitations: Most Canadian provinces don't have jingle mail options where you can simply return keys to lenders because mortgages are typically non-recourse. If you owe money on your home or condo investment, lenders can pursue your other financial assets.
- Bankruptcy Costs: While you can keep registered retirement savings plan holdings (except contributions made in the year before filing), your tax-free savings account and most other accounts will be lost. Pensions generally remain protected.
- Income Impact: "The biggest thing most people lose in a bankruptcy is a portion of their income," Hoyes explained. Bankrupt individuals must report monthly income, and those exceeding government thresholds face additional payments.
Timelines and Credit Implications
- Bankruptcy periods typically last nine months for lower-income individuals, extending to 12 months for higher incomes.
- A bankruptcy filing remains on your credit report for six years after the bankruptcy ends.
- Consumer proposals offer an alternative, staying on your record for only three years after debts are paid, but require total debts (excluding principal residence mortgage) to be $250,000 or less.
As real estate values fluctuate and financial pressures mount, more Canadians are facing difficult decisions about their property investments. While bankruptcy remains an emotionally charged option, it's becoming a more realistic consideration for those with underwater properties and limited alternatives.
