Reverse Mortgages And Bankruptcy

Although there is much disagreement as to whether reverse mortgages are a good idea, the fact is that they can be very helpful for some in certain situations. Like any other mortgage or loan, they do face some challenges when a person files for personal bankruptcy. However, the details behind a reverse mortgage can make them more challenging to manage, especially in a Chapter 7 case.

The Devil Is In The Details

The main point of concern with any mortgage entering bankruptcy is whether or not it will be protected from creditors. A home under a traditional mortgage is easily protected in a Chapter 13 case, but may require bankruptcy exemptions to protect it in a Chapter 7 case.  A reverse mortgages pose these unique challenges:

The amount of remaining equity. Since a reverse mortgage borrows against the home’s equity, whatever equity is left after the loan is viewed as an asset; therefore it must be protected from creditors.

The amount of unused credit on the loan. Any amount of money left on the reverse mortgage loan that was not used to pay for or purchase anything is not considered an asset, but may be viewed as income and is required to be listed on the bankruptcy petition.

The terms of the loan. In general, a reverse mortgage loan is not due for repayment until the borrower no longer occupies the home. However, the fine print may reveal certain conditions in which the full debt on the loan becomes due if the borrower files for bankruptcy. If the borrower is unable to repay the loan, these conditions may allow for the lender to foreclose on the home.