Filing for bankruptcy is not something that should be taken lightly. It is something you may want to consider if you have a lot of debt, but if you are older and have a reverse mortgage, it requires even more thought.
A reverse mortgage is a specialized loan for homeowners age 62 and older. It allows them to convert their home equity into cash. Unlike a traditional mortgage, the borrower does not make monthly payments to the lender; instead, the lender makes payments to the borrower.
You may wonder if having a reverse mortgage prevents you from filing either Chapter 7 or Chapter 13 bankruptcy. It does not, but reverse mortgages and bankruptcy can create unique issues, particularly when significant home equity remains in the property.
Many reverse mortgage borrowers have substantial equity in their homes. In bankruptcy, the amount of equity protected depends on applicable homestead exemptions.
In Chapter 7, a trustee may be able to sell the home if the equity exceeds available exemptions. In Chapter 13, you generally keep the property, but non-exempt equity can increase the amount you must repay creditors through your repayment plan.
Before filing for bankruptcy with a reverse mortgage, it is important to evaluate:
- The amount of equity remaining in the home.
- Available homestead exemptions.
- Whether reverse mortgage proceeds are protected.
- Any bankruptcy-related default provisions in the loan documents.
- Whether future reverse mortgage payments may be interrupted.
- Whether Chapter 7 or Chapter 13 offers better protection for the property.
FAQs
Q: Will I lose my home if I file for bankruptcy and have a reverse mortgage?
A: Not necessarily. Whether you can keep your home depends on factors such as the amount of equity in the property, the value of available homestead exemptions, and the type of bankruptcy you file. Many homeowners can retain their homes throughout the bankruptcy process.
Q: Does the automatic stay stop a reverse mortgage foreclosure?
A: In most cases, yes. Filing bankruptcy triggers an automatic stay that temporarily prevents creditors, including reverse mortgage lenders, from pursuing foreclosure actions. The lender must generally obtain permission from the bankruptcy court before continuing foreclosure proceedings.
Q: Are reverse mortgage proceeds protected in bankruptcy?
A: It depends. Funds that remain as home equity are often protected through homestead exemptions. However, once reverse mortgage proceeds are withdrawn and deposited into a bank account, they may not receive the same level of protection. Exemption rules vary by state.
Q: Will I continue receiving reverse mortgage payments during bankruptcy?
A: Possibly, but some lenders may temporarily suspend monthly advances or access to a reverse mortgage line of credit while a bankruptcy case is pending. Policies vary among lenders, and payments may resume after the bankruptcy case is completed.
Contact Us Today
Filing for bankruptcy with a reverse mortgage can be tricky. It is always best to discuss your unique situation with an experienced bankruptcy lawyer.
The Law Offices of Adam M. Freiman has the knowledge to help you make the right moves. Discuss your debt situation with us today, and we will help you understand your legal options. Schedule a consultation by calling (410) 486-3500 or filling out the online form.
