Filing for bankruptcy is an experience millions of homeowners have to face. In 2012 alone, there were 1,221,091 bankruptcy filings. There were about 13.4 percent more in 2011. Unfortunately, bankruptcy can have a lot of negative affects, both financially and emotionally.
For holders of reverse mortgages, bankruptcy can mean losing access to those crucial monthly payments that the bank issues to the borrower. This is because, in most cases, lenders are not allowed to access the funds in a reverse mortgage during bankruptcy proceedings. Also, people who file for bankruptcy are not supposed to take on any new debt under bankruptcy. Each monthly payment the borrower accepts is another chunk of debt.
Filers can request that their reverse mortgage payments continue through what’s called a “reaffirmation agreement,” however, there’s no guarantee that the request will be approved. Still, if you find yourself in this situation, it won’t hurt to try.
Lenders usually are not allowed to call the loan due during a bankruptcy. There are some mortgages, however, that do include provisions saying that the loan comes due upon filing for bankruptcy. The good news is, most bankruptcy courts do not allow this sort of thing. Bankruptcy is, after all, a more consumer-oriented process.
Of course, these are all generalizations of a typical bankruptcy and a typical reverse mortgage. You should know that bankruptcy laws vary from state to state and there are several different kinds of reverse mortgages out there, so if you find yourself in this situation, you should take the time to research the specifics and hire good representation. Your best bet is to discuss the issue with a qualified legal professional before filing for bankruptcy, in order to avoid any unpleasant surprises down the road. If you’re considering taking out a reverse mortgage, be sure to speak with an experienced mortgage professional to get all the details on this unique home loan program.
More About Reverse Mortgages:
- A reverse mortgage is a special kind of home loan that allows the borrower to access a portion of their home’s equity. The borrower can draw money from the mortgage principal in a lump sum, by receiving monthly payments over a specified term or for the rest of their lives.
- According to Gateway Bank Mortgage’s ReverseMortgageValue.com, reverse payments can be used for “whatever the borrower wants to spend the money on including home renovations, consolidating debt, paying for medical expenses and insurance costs, and traveling and other leisure activities”.
- Reverse mortgages are only available to borrowers age 62 or older.
- Reverse mortgages are repaid only when the borrower moves out of the home or dies – at which point the borrower, the borrower’s estate or their heirs must repay the loan in full.
- Reverse mortgages are known to be risky and expensive. Popular alternatives to taking out a reverse mortgage include traditional refinancing (lower your monthly payments by refinancing to a lower interest rate), home equity line of credit (only take out the funds you need and pay off interest as you go).
- Consult your children or other heirs before taking out a reverse mortgage. Since they’ll be responsible for paying off the loan (or selling the house) after your death, they should be aware of your financial plans and how they may affect their own future goals.