Published January 27, 2013
Dear Real Estate Adviser,
I have a reverse mortgage and have filed for bankruptcy. My lender has since stopped making monthly payments to me -- money that was providing me with basic living needs. There's no clause pertaining to this in my loan documents as far as I can tell. My attorney said he's never handled a bankruptcy with a reverse mortgage. What are my options? Would a reaffirmation agreement work? Can they call the note?
-- Ellen B.
Dear Ellen, Those crucial payments to you have stopped because borrowers aren't allowed to access funds, with some exceptions, from their reverse mortgages during bankruptcy proceedings. Filers, not surprisingly, aren't supposed to take on any new debt under bankruptcy. However, the bankruptcy court or the trustee monitoring the proceedings can approve your request for continued funds through a "reaffirmation agreement" that you mentioned, so by all means give that a try posthaste.
And no, the lender typically can't call the loan due because a reverse mortgage is generally treated like any other debt belonging to the bankruptcy filer. However, some reverse mortgages do contain a provision saying the balance owed on the home does come due upon filing, though bankruptcy courts tend to not allow this given the consumer-oriented bent of bankruptcy protection.
For those reasons and many others, it's important that you have effective, experienced representation. In fact, the time to thoroughly discuss the issues at hand with a competent legal professional is before the filing to avoid any of the unwelcome surprises you're now encountering. Here's hoping your attorney has since gotten up to speed on the reverse mortgage in a bankruptcy or you've secured alternative counsel.
Because state bankruptcy laws vary and there are several different types of reverse mortgages and bankruptcies, it's hard to tell you exactly what's going to happen next and when. It may have been advantageous to wait to file so the reverse mortgage could eat away more equity; there's a means test in Chapter 7 bankruptcy to determine eligibility and sometimes a reverse mortgage can be raising more income than is allowable under that Chapter 7 umbrella.
A reverse mortgage, for the sake of edification, allows people at least 62 years old to tap into the equity in their homes tax-free, either in the form of a set monthly dollar amount or a line of credit. Most reverse mortgages are backed by the Federal Housing Administration. The loans can be handy for many cash-strapped seniors, but they do come with some caveats and financial baggage.
Reverse mortgages typically have high origination fees and require additional insurance and new appraisals. Plus, their cash distributions can adversely affect long-term government health care assistance for lower-income persons -- and some forms of bankruptcy protection as earlier noted. Once a borrower dies or departs the home permanently, homes with such mortgages can be repossessed by the lender if the mortgage is more than the home is worth.
So, tread cautiously before taking on a reverse mortgage or filing a bankruptcy with one. Suddenly finding yourself with no home to leave to heirs or no income for basic living needs, sadly, can be one of the dire consequences of poor or misinformed planning. Good luck.
Copyright 2013, Bankrate Inc.