Reverse Mortgages and Bankruptcy: What You Need to Know
Reverse mortgages tap into the equity of your home and provide some form of financial assistance, whether it’s through a lump sum, a monthly stipend, or a line of credit. They are available to homeowners who are 62 or older and qualify not only in terms of home equity but also credit.
There are catches to reverse mortgages, however, that anyone considering them should be aware of. First, you have to pay all taxes and homeowner’s insurance on your own. If you fall behind on either one, the lender can initiate foreclosure proceedings. In addition, you also have to remain in your home. If, for instance, your health requires you to move into a nursing facility, the reverse mortgage can become due and payable.
Here's an even more interesting scenario: What happens if, even with the funds you’ve obtained or have available through your reverse mortgage, you run into financial difficulties and need to seek bankruptcy protection to keep afloat? What happens to your mortgage agreement and your monthly payments or line of credit? What if you took a lump sum and already exhausted it?
If you have a reverse mortgage and you live in or around Savannah or Hinesville, Georgia, contact John E. Pytte today. I will review your financial situation with you, examine the terms of your mortgage, and advise you of your best options going forward. If bankruptcy is involved, I will help you navigate the system until you obtain your fresh financial start in life.
Pytte Law also serves clients in the neighboring communities of Statesboro, Richmond Hill, and Ludowici, as well as throughout the counties of Chatham County, Liberty County, Bryan County, Long County, and Effingham County.
What Are Reverse Mortgages?
If you purchase a home, you generally will make a down payment and then obtain a loan for the balance from a lender. The resulting mortgage on your home requires you to make a monthly payment for a fixed term, often for 30 years, though it could be shorter. You get the funds to buy your home, and the lender gets an obligation from you to pay it off.
A reverse mortgage is one in which a lender taps into the equity in your home and provides a financial lifeline, which, as mentioned above, can be in the form of a lump sum, a line of credit, or a monthly payment. You must qualify age-wise (62 or older), credit-wise, and equity-wise. The amount you receive during the period of the reverse mortgage becomes due and payable if you die or move out of your home.
If you do move, or if you pass away and your heirs get title to the home, there are three options to repay the lender. You can sell the home. You can write a check if you or your heirs have the cash, or you can refinance. Barring any of these options, the reverse mortgage lender can simply repossess the property.
Types of Reverse Mortgages
There are three types of reverse mortgages:
The most used is probably a federally backed version called a home equity conversion mortgage (HECM). This type of reverse mortgage can be used for any reason, and it carries no income limitations or medical requirements.
If available, a single-purpose reverse mortgage, sometimes offered by state, local, and nonprofit organizations, can be less expensive in terms of fees and interest than a HECM, but as the name implies, the funds can be used only for a single purpose, perhaps home repairs or medical expenses.
A third type of reverse mortgage is called a proprietary reverse mortgage, which is offered by private lenders. If a homeowner cannot qualify for a HECM because their home equity value exceeds federal limits, then they can consider a proprietary reverse mortgage.
Understanding the different types of reverse mortgages is crucial for making informed financial decisions. If you're considering a reverse mortgage or need guidance on which option suits your needs best, your bankruptcy attorney can help you.
Bankruptcy and Reverse Mortgages
If you do have a reverse mortgage on your home and your financial situation makes bankruptcy a valid option, then you need to consider the options under the bankruptcy code. Chapter 7 is a liquidation of your non-exempt assets to satisfy your creditors as much as possible. Chapter 13, often referred to as “the wage earner’s plan,” allows you to repay your creditors over a three- to five-year period, if not fully, at least as best as possible.
The catch with any mortgage, traditional or reverse, is that it is a secured loan. Your home and its equity are tied into the mortgage. The lender can always choose to foreclose. Though filing for bankruptcy can make foreclosure more difficult for the lender, it is definitely a possibility.
If you choose to file for Chapter 7, your unsecured loans will be discharged rather quickly, within a matter of months, but your secured loans are another matter. In Georgia, you can obtain a bankruptcy equity exemption of $21,500 in your home – doubled to $43,000 if you and your spouse file together – so if your home is sold to satisfy creditors, you get to retain only that amount if your reverse mortgage hasn’t eaten it away.
Chapter 13 can allow you to retain your home, but you’ll have to pay anything owed to the best of your ability for three to five years. This is assuming that you have sufficient financial resources that allow for a monthly “disposable income” to be calculated.
The bankruptcy route can be challenging and a bit confusing, especially when you’re dealing with individuals who are probably retired and relying on Social Security and other retirement resources – and who have a reverse mortgage. You’ll need to review everything with a qualified bankruptcy attorney.
Turn to Dependable Legal Guidance
If you have a reverse mortgage and you suddenly face overwhelming debt obligations, whether due to health or other reasons, bankruptcy is certainly a viable option to obtain a fresh financial start. If you’re located in Savannah or Hinesville, or in any neighboring community or county, contact me at Pytte Law to weigh your options.
I will analyze your financial situation with you and advise you on the best path forward using bankruptcy. I will also see you through the process of getting a fresh start. Reach out immediately when difficulties arise.