Submitted by Rachel R on Thu, 01/08/2015 - 7:02pm
How does a reverse mortgage work with bankruptcy?
Image source: Flickr user American Advisors Group
If you already have a reverse mortgage or are considering taking one out and are also so deep in debt that you're thinking about bankruptcy, you need to consider carefully. Even if you don't know what a reverse mortgage is, you've likely seen the TV ads for them featuring Henry Winkler or Fred Thompson encouraging seniors to take out a reverse mortgage on their home to have more money for their retirement. Reverse mortgages have many vocal critics, but for some consumers, they are the only way to stay afloat financially. Today we'll explain how a reverse mortgage works and how bankruptcy affects the cash flow associated with it.
What's a reverse mortgage?
A reverse mortgage is a loan available to homeowners age 62 and older that allows them to access the equity in their home to provide much-needed cash. How it works is that the lender agrees to loan you a certain amount of money based on the equity in your home. But rather than you making payments, the lender pays you either in a lump sum, in installments or through a home equity line of credit where you can take funds out as you need them.
The loan is secured by your home and the loan balance grows over time. You can pay the loan off, but usually borrowers don't and the home is surrendered at some point in the future but cannot be taken while the borrower or their spouse still live in the home. This can be a useful way to generate cash when the equity in the home is the main asset that a consumer has. Those that haven't been able to save for retirement, but own a home often consider this option.
How does bankruptcy affect your reverse mortgage?
You can file for bankruptcy if you have a reverse mortgage, but need to take certain steps first. The first item to consider is whether your bankruptcy exemptions are enough to protect the equity in your home. You also need to get a payoff balance from your reverse mortgage lender to bring in to your bankruptcy consultation with your attorney. You also need to see if there is a bankruptcy clause in your mortgage documents. Some lenders will cut off payments during a bankruptcy process. Some may even try to call in the loan, but the bankruptcy judge can push back and may be able to protect you.
The simple answer is there's not a simple answer
Because every reverse mortgage differs and every consumers' circumstances are unique, there's not a simple blanket answer. If you are behind on your bills but are considering a reverse mortgage, it may be better to file bankruptcy first. To find out the best approach, find a reputable bankruptcy attorney that has handled bankruptcies with reverse mortgages – not every attorney has. If they haven't been down this road before, they won't know how to best protect your assets and your critical income stream that the reverse mortgage provides.
If you live in North Carolina, contact the bankruptcy experts at the law offices of John T Orcutt. We've handled cases with reverse mortgages and all sorts of unusual circumstances and are ready to helo you today. Call us at +1-833-627-0115 now for a no obligation totally free consultation.
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