Bankruptcy and Reverse Mortgages

A reverse mortgage is a loan based upon existing equity in your home and most are backed by the Federal Housing Administration. A significant amount of equity is necessary for this process. Significant usually means at least 50% loan-to-value rating. There are basically two types of reverse mortgages. One allows you to draw a fixed monthly amount, a line of equity credit, or a lump sum amount. The other type of reverse mortgage does not give you cash; it merely allows you to stop paying your monthly mortgage payments. You may apply for a reverse mortgage if you aged 62 or older. Reverse mortgages technically differ from traditional mortgages in that the borrower has no direct liability for the loan, and the loan is not "due and payable" until after the original borrower dies. Lenders will take possession of the residence upon reported death and will sell same to recoup their monies. There will be no implications reportable to deceased's probated estate. If the borrower has heirs who wish to retain the residence, the balance of the reverse mortgage must be satisfied in full. Be aware that reverse mortgage may come with high origination fees and usually require additional insurances and new house appraisals.

The merits of reverse mortgages will not be discussed here. The issue addressed is simply can someone with a reverse mortgage in place file for bankruptcy protection? The simple answer is yes you can. There are, however, three issues which must be addressed.

The first issue for review is the actual value of your home. Most states (excluding) Florida, do not allow you to protect 100% of the equity in your home during bankruptcy proceedings. If you are considering a reverse mortgage make sure that the amount of equity in your home is an amount you can protect in bankruptcy.

Secondly, you need to be aware of some basic financial implications. Traditional mortgages are paid monthly and your balance, consequently, goes down. With a reverse mortgage, your balance is going up! If filing for bankruptcy you will need a statement from your lender regarding outstanding balance(s). As an aside, if asking a lender for such a statement, ask for a "10-day-payoff" even though you are not paying off the loan; you want your figures to be as accurate as possible for the bankruptcy paper work.

The third issue involves monthly payment scenarios. Many reverse mortgages have bankruptcy clauses which will close equity lines of credit or stop monthly distributions. There are also clauses which may call for payment of all balances owed should bankruptcy protection be sought by the borrower. (Bankruptcy courts lean more often than not in favor of the consumer which is basis for bankruptcy protection in the first place; hence such a provision may not be enforced by the court). Check your paperwork. If this is the case and you are relying on these monies, obviously you do not want to file for bankruptcy. It technically makes sense that borrowers should not be accessing funds while filing for bankruptcy. Filers should not be looking to compound current debt with new debt. However, a bankruptcy court or trustee is able to allow you access to your funds through what is called a reaffirmation agreement.

This is a relatively new area for all parties concerned. It behooves you to make sure that you are receiving information from a professional so that you can always make an informed decision regarding reverse mortgages and bankruptcy.