Can You File for Bankruptcy with a Reverse Mortgage?
In August 2018, the New York Times reported that bankruptcy filings among senior citizens skyrocketed over the past two and a half decades. Rising healthcare costs, diminished pension benefits and the erosion of Medicare and Social Security benefits have contributed to the trend, according to a study by researchers from the Consumer Bankruptcy Project.
A reverse mortgage, although not ideal for every senior homeowner, can provide a financial cushion to help ease the burden of growing healthcare and living costs. However, some homeowners still may find themselves having to face bankruptcy even with a reverse mortgage. If you are one of these homeowners, here’s what you need to know.
Reverse mortgage borrowers are allowed to file for bankruptcy, but there are three key factors you need to consider before doing so.
You’ll need to be sure the equity in your home is not more than you can protect. With few exceptions, reverse mortgage borrowers filing bankruptcy may not be able to protect 100 percent of the equity in their home. Most people have equity in their home when they sign up for a reverse mortgage, so you need to be certain the equity is not more than you can protect.
Home values have seen declines throughout the country since 2007, though they have since begun to get back on track and have even seen robust increases in many parts of the nation. If you received a reverse mortgage around 2007, your home’s value could be equal to the current balance. You can usually do a little research online to get an estimate of your home’s current market value, but the only way to know your home’s value for sure is to get a professional appraisal.
You may be thinking, “I don’t have to make monthly payments so there is no balance!” Well, the first part of that sentence may be true, but the second part is not. Even though you don’t have to make payments on your reverse mortgage, the balance is still there. In fact, the balance grows every month because you are not making payments.
In order to file for bankruptcy, you will need to find out the current balance of your reverse mortgage. This will likely require you to request a current balance statement or a “10-day payoff statement” from your lender. While the 10-day payoff statement is traditionally used when you’re trying to sell a home, it can be used in this case, as it will give an accurate statement of the mortgage’s balance as of today.
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Payments/Line of Credit & Bankruptcy Clause
In some cases, reverse mortgage contracts may include a clause that allows the lender to cease distribution of payments or freeze a line of credit in the event that the borrower files for bankruptcy. If you are dependent on the proceeds from your reverse mortgage, this could eliminate bankruptcy as an option and you may need to consider other alternatives.
While some lenders will continue to distribute payments after a bankruptcy, even with a bankruptcy clause, each scenario is different and with such a clause, the decision is ultimately at the lender’s discretion. If your lender does continue with payments, you may need to file a reaffirmation agreement while you are in the active bankruptcy process. Talk to a licensed financial adviser for more information.