Bankruptcy And Reverse Mortgages
We often talk about mortgages and homes when it comes to bankruptcy. But what about a reverse mortgage? How does filing a bankruptcy affect a reverse mortgage?
What is a Reverse Mortgage?
A reverse mortgage allows people to use the equity in their homes to pay themselves a regular income.
Normally, if you have equity in a house, that’s great. But it doesn’t buy groceries or pay your bills. With a reverse mortgage, it can. Although there are many ways that reverse mortgages are structured, generally, every payment you receive lowers your equity.
For elderly people, this may not be an issue—they may have no intention of ever selling their homes. But for elderly people looking to leave their homes to family members, a reverse mortgage can eat up the equity in the home. Worse, many reverse mortgages say that on the death of the owner, the entire loan must be paid back.
Exemptions in Bankruptcy
The good news for Floridians is that there is no limit on the exemption for a homestead. That means that even if your home has a lot of equity, and you file bankruptcy, you won’t lose the home.
Defaults and Payments
Many reverse mortgages have provisions in them that make filing for bankruptcy a default. However, in reality, most lenders will not enforce this provision. If they did, they would need permission from a judge, most of whom are unlikely to ever enforce this kind of provision, as contracts that make bankruptcy a default in an agreement are usually held to be unenforceable.
What banks will do is stop payments to you on the reverse mortgage when the bankruptcy is filed. However, you can file a motion and ask the court to allow the payments to resume. There is nothing inherent in bankruptcy law that prevents you from getting your reverse mortgage payments during the bankruptcy.
Transferring and Protecting Assets
You should avoid transferring large amounts of money into your home. As a general rule, with asset protection, you could take a large amount of cash, put it into your home, create equity, and then draw from that equity with the reverse mortgage, free from creditors.
But this is one area where general asset protection methods don’t apply to bankruptcy, because in bankruptcy, you risk the influx of cash into the reverse mortgage as being seen as fraudulent.
Catching Up on Insurance or Taxes
In many reverse mortgages, people are unable to pay taxes or insurance costs, all of which still must be paid with a reverse mortgage. A bankruptcy will stop a foreclosure based on these costs, the same as it would halt any other kind of foreclosure.
If you are filing Chapter 13, and you have only missed one or two property tax payments, you may be able to pay that money back through the course of the Chapter 13 plan, and keep the property.