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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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19 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.

  16. Teresa Congleton says:

    Because the guidelines are changing in March 2015, I would have only paid 5 payments on my Chapter 13 bankruptcy and now realize I will never qualify for a reverse mortgage. They will start reviewing credit history, employment, etc. beginning March 2, 2015 and I won’t be 62 until April 2015. Currently there are no verifications – but come 2015 it will restrict many 62 and above from obtaining a reverse mortgage. Please comment if you can.

  17. Mike Branson says:

    Hi Theresa,

    Your dates for financial assessment is correct, and the guidelines for someone in Chapter 13 bankruptcy are that you have to have at least 12 months’ on time payments and you must have permission from the bankruptcy court to obtain the reverse mortgage which you cannot squeeze in prior to the March 2nd deadline. You would have to have another 7 months’ on-time payments before application to be able to qualify for a reverse mortgage even under the current guidelines.

    However, this does not mean that you will never be able to qualify. It may take a stronger equity position but HUD has indicated that borrowers who do not meet income and credit criteria may still be able to qualify for a reverse mortgage if they have the income required to meet the residual income requirements and can establish the set aside for taxes and insurance. In other words, if the borrower’s income is sufficient to cover the anticipated living expenses for the region of the United States in which they live and there is enough money available to them through the reverse mortgage that the lender can set aside sufficient funds to pay their anticipated taxes and insurance over their estimated life span based on actuarial tables, borrowers may still be eligible for reverse mortgages.

    We have only had one industry-wide conference call with HUD about the new guidelines and their implementation thus far so there are many things we still don’t know. There were many questions still left unanswered from the call so HUD still needs to iron out several issues. The basic idea is that HUD does not want to insure reverse mortgage loans for borrowers who will not be helped by the program anyway or have shown that they have a total disregard for the payment of their obligations and in either case, will default on taxes and insurance or do not have the resources to continue to live in a home, reverse mortgage or not. HUD is not trying to stop the loan for borrowers who have had some credit issues, they are trying to make certain that the program remains solvent for all borrowers. They believe, rightly or not, that these are the steps that will do so.

    In your case specifically, you have 7 months to be certain that all recent credit is current (and all bankruptcy payments must be made on time). Your income will be reviewed as will all borrowers at that time and you will have to meet the income requirements of the program. If you have a lot of equity in your home, you will be in a much better position as the lender will be able to establish the set-aside for the taxes and insurance which will most likely be required for borrowers with recent bankruptcies.

  18. Nancy Barber says:

    My parents got a reverse mortgage about 15 years ago. My father has since passed and my mother still lives in the house. They received a single cash payment, not monthly payments. My mother is thinking about filing for bankruptcy but is afraid the mortgage company will force her to move out of her house. Is this posssible? We have asked her lawyer but he doesn’t have a diffinitive answer saying they can do whatever they want. It’s an HECM reverse mortgage with Celink. I thought they couldn’t make you move, especially since she doesn’t make payments to them. Isn’t her type of mortgage protected by the government?

  19. Mike Branson says:

    Hi Nancy,

    I think the first thing you might want to do is start interviewing for a new attorney! No attorney can specialize in all areas of the law, but any attorney should be able to tell you that the lender has only the rights granted to them in the legal documents- the lender cannot do whatever it wants!

    In all honesty, I do not remember what the documents from 15 years ago outlined as lender rights in the instance of bankruptcy. For many years now, the documents have given the lender the right to cease additional draws on the line of credit until the bankruptcy was completely settled and I would imagine that your mother’s do as well.

    Since your parent’s took a full draw, there would be no additional draws to suspend so that is not an issue. If your mom continues to pay her taxes and insurance and maintain the home as required under the terms of the loan, the bankruptcy should have no effect whatsoever on her loan and no, they cannot call the loan due and payable forcing your mom to move without such a provision in her loan documents (which again, I do not believe is there but I don’t have a set of documents available from 15 years ago that I can review).

    Since I am not an attorney and cannot give you legal advice, I would suggest that you see if your mom has a copy of her documents from when they first obtained the loan. I strongly suspect that once reviewed an attorney would be able to deduce that your mom is in no danger by initiating a bankruptcy proceeding. You could also contact Celink directly and ask for copies of the legal documents if your mom cannot find them. I think if you asked Celink, they would tell you there is no issue with mom declaring bankruptcy but if you want the legal opinion as well after a review of the documents, that might give you even more peace of mind.

    The bottom line is, the lender must follow the agreement for the loan as outlined in the Note, Security Agreement and Deed of Trust (or Mortgage depending on in which state you live). Please don’t settle for any “legal opinion” that tells you a lender can do whatever they want!

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