Filing for Bankruptcy with a Reverse Mortgage
More and more people, especially those who are nearing or have entered retirement, are using reverse mortgages to help them make ends meet. Unfortunately, even with a reverse mortgage, you can run into financial difficulties. If your financial situation is drastic enough to warrant bankruptcy, how will filing affect your reverse mortgage?
Here’s what you need to know:
What is a Reverse Mortgage?
First, it’s important to understand the concept of a reverse mortgage. Chances are if you’re involved in one you’ve already taken time to understand how it works, so this information will serve as a quick refresher.
Reverse mortgages are for people aged 62 and older who have built equity in their homes. A reverse mortgage makes it possible to access that equity and use it to pay expenses. Reverse mortgages can be paid in a lump sum or in monthly payments, or a combination of both.
Reverse mortgages do not need to be repaid until the homeowner dies, the home is sold, or the homeowner is not occupying the home for one year (usually because of an assisted living or similar living arrangement). Reverse mortgages must also be repaid if the homeowner is found in breach of the loan, which might happen due to neglected maintenance or failure to pay insurance.
Reverse mortgages can be a helpful arrangement for someone on a fixed income, but they aren’t for everyone. If you’re considering a reverse mortgage, it’s important to consider the pros and cons, and discuss your options with an expert before making a commitment.
To learn even more about reverse mortgages, check out this information from New Retirement.
How Bankruptcy Affects a Reverse Mortgage
Assuming you or a loved one already has a reverse mortgage and bankruptcy is not a possibility, there are several things you need to know.
You might be eligible for Chapter 7 or Chapter 13 bankruptcy with a reverse mortgage, based on the usual qualifying factors. In many respects, a reverse mortgage is treated in bankruptcy much like a traditional mortgage. Bankruptcy cannot eliminate the mortgage, but there might be ways to remain in your home if you file.
Begin with an assessment of the equity you have in your home. In Chapter 7, the amount of equity in your home after considering the balance of the reverse mortgage must be below the threshold to avoid having the trustee attempt liquidation. With little to no equity, chances are the trustee won’t bother liquidating your home.
Next, you’ll need to determine if the lien holder on your reverse mortgage will continue sending you payments after filing for bankruptcy. You can check your reverse mortgage agreement to determine whether this is a concern or not. If you rely on your reverse mortgage for day-to-day expenses, it’s important you understand how these will be affected if you file for bankruptcy. Your bankruptcy attorney can review the reverse mortgage documents and help you determine how to proceed.
Finally, you’ll want to work closely with your bankruptcy attorney to ensure your bankruptcy petition includes any and all exemptions you want to be protected in your bankruptcy. Bankruptcy is a complicated process, made more so when a person has an unusual circumstance such as a reverse mortgage. An experienced attorney helps to ensure there are no unpleasant surprises during or after you file for bankruptcy.