If you have a reverse mortgage and are worried about foreclosure, you may be looking at bankruptcy. So, will bankruptcy keep your home protected? First, you should know what a reverse mortgage is and how it works.
So, How Does a Reverse Mortgage Work?
A reverse mortgage is a loan. However, the homeowner needs to be 62 or older. If that homeowner has enough home equity, they can borrow against the value of their home to receive:
- a lump sum payment
- a monthly income
- access to a line of credit
- eliminate the monthly mortgage payment
In a reverse mortgage, the homeowner is not required to make loan payments. This is different than a forward mortgage, which is typically used to buy a home. Instead of monthly payments, the entire loan balance will become due if the borrower sells the home, moves away, or if the borrower dies. There are federal regulations ensuring that the loan amount does not exceed the value of the home. The borrower will not be responsible for paying the loan difference in the event it is larger than the home’s value.
Reverse Mortgages and Bankruptcy
Since the most common reverse mortgages are secured by the home of the borrower, it is considered a secured debt. There are no laws preventing a person with a reverse mortgage from filing for bankruptcy.
It is important to meet with an attorney, as some reverse mortgages consider a bankruptcy a breach of contract. This could result in a foreclosure. While this is not common, it is still possible. You also may not be able to protect all of the equity in your home. Your attorney will know the best ways to protect you and your assets in your bankruptcy filing.
What are the Problems With Reverse Mortgages?
Be sure that you and your attorney look at your home’s value and the reverse mortgage’s balance before filing. You will want to be sure of how much equity is protected in your bankruptcy. Keep in mind that the monthly amount owed in a reverse mortgage can increase. It may be a good idea to find out a payoff amount from your lender prior to listing an amount in your bankruptcy.
Are You Receiving Reverse Mortgage Payments?
It is likely that your bankruptcy filing may lead your lender to stop these payments. Your lender might also have the ability to attempt a foreclosure if you file for bankruptcy. Using an equity line of credit from your reverse mortgage? A bankruptcy filing might also stop this line of credit. You and your attorney should go over the clauses and terms of your agreement to determine if this is a possibility. You may need to reaffirm the reverse mortgage debt to receive these payments.
Things to Keep in Mind
First, how your reverse mortgage is handled will depend under which chapter of bankruptcy you file.
Do you have a first mortgage as well as a reverse mortgage? If so, this may complicate your bankruptcy. Your reverse mortgage attaches a lien to your house. Your attorney will need to address this in the bankruptcy, so be sure to thoroughly go over your finances with your attorney before filing.
Need More Information?
Before you take any action, be sure that you are informed. At the Law Office of Daniela Romero, we believe in relationships that are based on trust. Before we work together, we would like you to get to know us. This is to make sure you are the right fit for us and that we are the perfect fit for you, so that you can be completely comfortable sharing even the most intimate and difficult details of your case with us so we can offer you representation to the fullest extent of the law. Call us for a free consultation to find out the options that will work best for you.