Closing shortfalls and the insolvency question

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What mortgage professionals should establish before referring a failed closing

CMP READERS will recognize Fergal McAlinden's August 21 report on appraisal shortfalls and failed financing. The calls reaching me begin where that report ended. A pre-approval from 2021 or 2022 can return as a different file: the appraisal no longer supports the contract price, financing is short, and an assignment is no longer executable. When I wrote in 2021 and 2022 about where this market might lead, I felt like the uninvited dinner guest who lights a cigar halfway through the main course. The knowledge gap then ran one way: purchasers and some advisors did not appreciate that debts from a failed closing might, if they made the purchaser insolvent, be restructured through a proposal under the Bankruptcy and Insolvency Act. Here, a consumer proposal means a formal offer under the act, made through a Licensed Insolvency Trustee, by which an insolvent individual asks unsecured creditors to accept changed payment terms; the Consumer Proposal Resource Centre explains the process in full. A Division 1 proposal is the act's more formal route for individuals or corporations. It has no consumer-proposal debt ceiling, requires creditor voting and court approval, and carries more serious consequences if it fails; Division 1 Proposals in Plain Terms explains those differences.

Paul Franchi, JD, MBA, CIRP, is a Licensed Insolvency Trustee based in Toronto, Ontario, and a current member of the Law Society of Ontario. A former practising litigation lawyer, he brings 15 years of New York City finance experience to his insolvency practice, with a focus on consumer restructuring, complex creditor disputes, and the financial pressures driving household insolvency in Canada. He is the publisher and editor-in-chief of The Insolvency Report, and his work has appeared in Insolvency Insider and Advisor Perspectives, among other publications. His research is written for Canadian borrowers, their families, and the professionals who advise them.

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“A purchase contract that has turned against the buyer, a financing shortfall, and the purchaser's solvency are three different problems. They may converge, but they must be assessed separately”

Paul Franchi, The Insolvency Report

Today, the pendulum has swung farther in the opposite direction. I increasingly hear from underwater purchasers who assume a proposal can release them from a purchase agreement that no longer makes economic sense. Brokers need to know where that boundary lies. A purchase contract that has turned against the buyer, a financing shortfall, and the purchaser's solvency are three different problems. They may converge, but they must be assessed separately. A proposal may deal with debts arising from a failed closing when the statutory conditions are met. It is not, by itself, a mechanism for cancelling an underwater purchase.

The report follows the file beyond the financing shortfall, through failed-closing exposure, insolvency tests, proposal options, and the referral decisions that matter. Open the full report here. Three questions, in the right order First, can the transaction close on executable terms after the appraisal? Second, if it cannot, what does the agreement require, and is there a viable assignment, negotiated exit, or other contractual response? That question belongs with the purchaser's real estate lawyer. Third, if the transaction fails, can the purchaser meet the resulting obligation together with the household's other debts? That is the question for a Licensed Insolvency Trustee. An adverse appraisal may trigger the problem, but it does not establish insolvency. A borrower may have a severe liquidity problem without being insolvent; what looks like a financing problem may also conceal an unmanageable debt burden. The sequence matters. The useful distinction is between a clause that permits an assignment and an executable transaction that resolves the purchaser's exposure. Can the necessary consent be obtained in time? Can the assignee's financing close? What are the net proceeds after builder charges, commissions, and tax consequences identified by the appropriate adviser? Most importantly, is the original purchaser released? An advertised assignment price is not the net result or proof of market depth, and it does not establish release. Those points should be confirmed before an assignment is treated as the answer. Urbanation's second-quarter survey is more instructive than its headline. Overall, new-condominium sales rose 52 percent from a year earlier, but nearly all of that gain came from completed projects, including some large bulk sales to investment groups. Pre-construction sales moved in the opposite direction.

Actual sale prices were generally well below asking. These are market signals, not appraisals. They explain why an expected first mortgage, possible private second, and hoped-for assignment are not interchangeable. What matters is financing that can fund, cash available, and the net result of an exit that can close. Many purchasers reaching my Ontario practice are relatively new to Canada. Some watched friends or family prosper from condominium investments during the long rise in the market. They hoped a pre-construction purchase would become their own launchpad and a first piece of Canada they could call home.

When the transaction becomes impossible to carry, the loss is more than a failed investment. It can consume years of savings and damage the family's plan to build a life and own a home in Canada. For some families, the financial crisis also brings urgent questions about immigration status. Those questions should not be compressed into a sentence in a mortgage article or answered by assumption. I have addressed them separately in Debt, Bankruptcy and Immigration in Canada: What Newcomers and Sponsors Need to Know. Before the referral For a useful referral, establish: the current appraisal and the financing that is genuinely available the purchaser's actual cash shortfall and ability to carry the proposed debt the real estate lawyer's position on the agreement, deposit, notices, deadlines, and any assignment or negotiated exit the net economics of an assignment, including whether the purchaser would receive a release the household's broader debts, assets, income, and near-term obligations

Published Sep 21, 2026

“The broker is often the first professional to see that an ordinary closing file has become something else”

Paul Franchi, The Insolvency Report

Can the transaction close on executable terms after the appraisal?

Three questions before the referral

The broker is often the first professional to see that an ordinary closing file has become something else. Recognizing that change early requires separating what financing can solve from what it cannot, then bringing in the right expertise before assumptions harden into losses. A proposal can be a serious restructuring tool when a failed transaction has produced debt an insolvent purchaser cannot pay. It is not a way to make an uneconomic purchase agreement disappear. For the full analysis, continue to the Industry Alert being presented first to CMP readers.

INDUSTRY ALERT Available first to CMP readers: A condo purchaser's nightmare, revisited

5,001

Source: Urbanation Inc., Q2-2026 Condominium Market Survey, July 20, 2026. Asking prices, not achieved prices.

asking-price premium over resale in recently registered buildings

pre-construction units sold in the quarter

completed, unsold units held by developers

$1,186 versus $830 per square foot

down 80% from a year earlier

record-high and up 68% from a year earlier

43%

Pre-construction condo market, second quarter

If it cannot, what does the agreement require, and is there a viable assignment, negotiated exit, or other contractual response?

If the transaction fails, can the purchaser meet the resulting obligation together with the household's other debts?