Bankruptcy and reverse mortgages

by Francine Huff
March 15th, 2011

Maybe you got a reverse mortgage a while back and are still struggling with mounds of debt. If you’ve exhausted all your options for getting things under control, you may be contemplating a bankruptcy. Here’s what you need to know about how a bankruptcy filing affects a reverse loan.

Using reverse mortgages

Reverse mortgages allow people aged 62 and up to convert some home equity into cash. The money can be taken as a lump sum, through installments, or as a line of credit. Reverse loans are designed to help senior citizens supplement their income, but some borrowers may still find themselves accumulating even more debt above and beyond reverse loans.

What about foreclosure?

Filing for bankruptcy doesn’t automatically mean that you’ll lose your house through foreclosure if you have a reverse mortgage. But the property is an asset, and might be liquidated in a Chapter 7 filing to help pay off debt. According to David M. Siegel, an Illinois bankruptcy attorney, “A trustee in a Chapter 7 bankruptcy case can liquidate real estate secured by a reverse mortgage if there is available equity above and beyond what a debtor can protect as exempt.”

Repaying a reverse loan

Generally, a Chapter 13 bankruptcy filing involves setting up some type of repayment plan for debt. Reverse mortgage debt may be structured so that interest and monthly payments are more affordable. Under the United States Bankruptcy Code repayment plans can last up to five years, so if reverse mortgage debt is involved it would have to be paid off in that time. Obviously, it can get quite complicated trying to work out a repayment plan for a senior who is on a fixed income. Consult with a qualified bankruptcy attorney who can guide you through the process.

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