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Reverse Mortgage & Bankruptcy Implications

December 19th, 2011
     

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We have recently had several borrowers who had previously obtained a reverse mortgage call and ask us what the effect would be on those reverse mortgages if they had to now begin a bankruptcy proceeding. While we are not attorneys and would always advise you to seek competent legal advice from an attorney in your state, we did want to contact an expert in the field of loan servicing for reverse mortgages and get some additional information that we could pass on. We contacted Ryan LaRose, Chief Operating Officer of CELINK, the nation’s largest reverse mortgage subservicer to ask just what does happen when a reverse mortgage borrower files for bankruptcy.

Ryan told us that there is a myth about reverse mortgages and bankruptcies – that many believe that the lender would immediately call the loan due and payable when notified of such an event. He stated that this simply is not the case. The servicing agent does receive notice of the filing which they in turn send to their attorneys to file what is known as a “Proof of Lien” which protects the reverse mortgage lenders interest in the property during the bankruptcy proceeding. There are some other steps the servicer must complete prior to the dismissal or discharge of the bankruptcy, but calling the loan due and payable is not one of them.

There is one thing that Mr. LaRose did caution about…

While the servicing company does not give the courts an accounting of any remaining funds available to the borrowers on their existing reverse mortgages on credit lines and under monthly payment provisions, borrowers cannot receive funds from their reverse mortgage during the bankruptcy proceeding. This is due to the fact that the Bankruptcy Trustee must approve any funds the borrower receives during this time as borrowers are prohibited from incurring new debt during the Bankruptcy period.

Mr. LaRose warns that borrowers planning to file for protection under the bankruptcy laws and then live off of their reverse mortgage proceeds may be in for a big surprise when they find out that they cannot obtain any additional funds until the Bankruptcy has been completed. This is another area that reverse mortgage borrowers should definitely discuss with their attorneys before they file. But it is comforting to get the facts in lieu of the myth when it comes to Bankruptcies and existing reverse mortgages. As we stated in the beginning, this is not legal advice though, be sure to consult your attorney before you do anything which may affect your individual circumstances!

“Reverse Mortgage & Bankruptcy” by www.allrmc.com

The experts at All Reverse Mortgage® are here to answer your questions! If you have a question regarding reverse mortgage bankruptcy guidelines give us a call Toll Free (800) 565-1722 or request a quote by clicking here »

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15 Responses to “Reverse Mortgage & Bankruptcy Implications”

  1. James D. says:

    CAN I GET A REVERSE MORTGAGE IF I AM ON CHAPTER13 BANKRUPTCY

  2. admin says:

    Hi James-

    A borrower currently in the process of Chapter 13 bankruptcy can still get a reverse mortgage, but only if they have been on a minimum of 12 months payment schedule and have met all their obligations in a timely manner as required by the court.

  3. wade hodder says:

    Can I still get a reverse mortgage after I file for bankrupcy?

  4. Mike Branson says:

    Hello Wayne,

    Yes you can. For Chapters 7 and 11 and there is no waiting period. On these two procedures you just cannot be still in the process of the Bankruptcy but you can apply the day after the bankruptcy is discharged, but it must be discharged by the court.

    The requirements for a Chapter 13 Bankruptcy are a bit different. If the Bankruptcy is still ongoing, in other words, the petition was approved by the court and you are still in the repayment period, you must have a minimum history of 12 months of making the court approved payments on time. If the Chapter 13 Bankruptcy is finalized and discharged, there is no further waiting period required.

    There is one other circumstance to consider in the application timing. If you file for bankruptcy but have not had your petition heard yet and then later you decide that you don’t need to complete the bankruptcy or choose not to continue for reasons of your own, you can have the filing vacated by the court and complete a reverse mortgage with no waiting period. The whole question in this is whether by saying “after you file for bankruptcy”, what stage of the process that really puts you in.

    Last but not least, there are restrictions and questions regarding your intent to file for bankruptcy after you close your reverse mortgage. You need to read your reverse mortgage documents carefully if you believe that a bankruptcy filing may be in your future after you close your loan.

  5. Fears Law says:

    It is also really important to remember that filing of a bankruptcy itself is NOT a default under the reverse mortgage agreement. Great article.

  6. John Sliman says:

    I did a short sale in April 2011 on my previous home and it is now Jan. 2013, I own my current home free and clear. The lender forgave the balance on the short sale and I am 64 and want to do a reverse mortgage on my current home. Will I still be eligibile for the Mortgage?

  7. Mike Branson says:

    Good Afternoon John,

    You are eligible at this time provided that the previous loan was not a government insured or guaranteed mortgage with a loss that the insurance or guarantee had to pay. However, HUD has announced that they will implement qualification guidelines in the near future as a form of financial assessment so that may not be the case after they announce their new guidelines. Many lenders are already implementing their own version of financial assessment and so you would have to discuss your individual case with a reverse mortgage specialist.

  8. JENNIFER says:

    WHAT HAPPENS WHEN THE PERSON NAMED ON THE REVERSE MORTGAGE DIES ?

    WILL THEY LET THE HEIRS PAY PAYMENTS ON IT UNTIL THE BALANCE IS PAID OR DO
    YOU HAVE TO GET A NEW LOAN ?

  9. Mike Branson says:

    Hello Jennifer,

    When the last surviving borrower passes the heirs will have up to 6 months to refinance the loan or up to 12 months (with extensions) if they are making efforts to sell the property. There are no payments required within this timeline and interest will continue to be added to the balance each month until the loan is repaid. Read more on the reverse mortgage maturity in this post or feel free to contact us at 800-565-1722

  10. Bruce says:

    I had a reverse mortgage and filed for bankruptcy-I moved out of the house 10 months ago and the house is still in my name. I had no monthly income from the mortgage company. I owed them 180,000.00 and it was part of the bankruptcy. Does the reverse mortgage company still own the property or do I since it is still in my name? I wonder if I can sell the home.

  11. Mike Branson says:

    Hi Bruce,

    You always owned the home and unless the lender has already foreclosed on the Deed due to the default, you still own it. If there is still equity in the property and the lender has not foreclosed at this time, I would highly encourage you to see if the lender has begun any actions at this time. If there is no foreclosure filed, move back in and list the property for sale if there is equity and that’s what you want to do. It’s your home and you can live in it or sell it, which ever you choose. If the lender has already initiated some sort of action, I would encourage you to contact the lender and see what you can do at this time to stop the action. I don’t know what you did or did not default on at this time (taxes, insurance, maintenance, etc), but if you have not been out of the house for 12 months yet, you are not in violation of the provision that you cannot be gone of 12 months or more. I think you should look into it very quickly.

  12. doug says:

    We own a home now that has recently sold. We are currently in a chater 13. The proceeds from the sale of our home will allow us to cash out on the purchase of a condo which will be homesteaded. If subsequent to this transaction we had to convert to a chapter 7 would we still be able to get a reverse mortgage?

  13. Mike Branson says:

    Hi Doug,

    To get an approval for a reverse mortgage for a borrower currently in Chapter 13 bankruptcy, you need to have been making on-time payments for a minimum of 12 months and have court approval to enter into the reverse mortgage transaction. since HUD has announced that they will be implementing financial assessment guidelines, most lenders will also verify that you have the financial capability to make all the payments in a timely manner, especially in the case of a purchase where additional taxes, insurance HOA dues may be incurred.

    If you think you may want to consider a Chapter 7 Bankruptcy later, then a reverse mortgage is not a good option for you. The reverse mortgage loan documents give the lenders the right to call the loan due and payable if you file the bankruptcy after you close the loan. The documents do not state that the loan will definitely be called, but borrowers contemplating a bankruptcy action should know that this is a reason that the loan can be called due and payable.

  14. haggy says:

    if i filed chapter 13 and making payments, then decided to reverse mortgage my home can bankrupcy take the money

  15. Mike Branson says:

    I’m sorry, I can’t give you legal advice and I certainly would not try to tell you what a court can or cannot do. I can tell you that to do a reverse mortgage while you have a non-settled, ongoing Chapter 13 Bankruptcy, you would have to have a minimum of 12 months of on time payments and the court would have to approve the loan. You would have that opportunity to determine exactly what the court would and would not approve prior to completing the loan.

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