More senior citizens are filing for bankruptcy than ever before. Across America, people are spending their golden years burdened by excessive medical and student loan debt.
That means many people who file for bankruptcy have reverse mortgages. It’s important to understand how your reverse mortgage can be impacted by your bankruptcy and what your bankruptcy lawyer can do to account for it.
There are five factors you and your attorney will need to take into consideration when evaluating your bankruptcy options.
#1) Your reverse mortgage type.
There are two types of reverse mortgage: a lump sum distribution or a monthly distribution.
If you took a lump sum distribution you will need to pull out your records of how you spent that money. Certain expenditures could make bankruptcy a bad idea for you. Gather receipts and invoices, and bring them to your consultation with your attorney.
Most seniors take monthly payments. The problem with monthly payments is they stop during the bankruptcy. Chapter 13 is 3 to 5 years long, and even a Chapter 7 can take up to 9 months. Unless you have an alternative source of income the road ahead can be tough.
In some cases, you can use Chapter 13 if you have the funds tucked away to account for twelve months. After 12 months of on-time payments the Trustee can approve the receipt of funds from a reverse mortgage.
Thus, if you’re considering bankruptcy you might need to set aside money now. You might also want to temporarily get a job to help you set aside the money.
#2) Your home equity.
Federal exemptions allow you to protect a portion of your home’s equity in Chapter 7. If you got your reverse mortgage very recently it may be difficult, if not impossible, to hold on to the house, because you had to have over 50% equity in your home to take out the mortgage.
If you’ve lived with the reverse mortgage awhile you could be in the clear, since your loan balance is now increasing every month. Reverse mortgages are designed to let you stay in the house until you sell it, die, or move out.
Work with your attorney to look at home values in your area as well, since this can have an impact on your equity. Plan on paying for a professional appraisal, and contact your lender to determine your current payoff amount.
New York allows you to choose between federal exemptions and state exemptions. If you’ve lived in the state for over 60 months you can use the New York State exemption, which protects up to $142,350 of equity here in Orange County.
#3) The terms of your loan.
No. The automatic stay protects you from this kind of action. Instead, the reverse mortgage lender sends a “Proof of Lien” to your attorney. This protects the lender’s interest in your property.
In most cases, as long as you continue to live in your home you can reaffirm the debt to keep the reverse mortgage active during a Chapter 7 bankruptcy. Once you receive your discharge you’ll start getting your monthly payments again.
Be careful. Bring a copy of your loan agreement to your attorney. Many agreements demand you give up the house if you file for bankruptcy, and some lenders will end the reverse mortgage if you file.
#4) Your eligibility for Chapter 7.
Since Chapter 7 is the only viable option for most seniors you’ll want to pay attention to the bankruptcy means test. Your reverse mortgage payments count as income even though they stop during the bankruptcy process.
Income isn’t the only thing that’s tested. Your assets are as well, as is your disposable income, the amount that’s left over every month after necessities like food and utilities are seen to.
The formulas are complex. Go over them with your attorney before you decide bankruptcy is right for you.
The Common Theme
By now you’ve picked up on a common theme. While many people try to save pennies by filing Chapter 7 bankruptcies on their own, it’s simply not an option for a reverse mortgage borrower (and isn’t a good idea for anyone else). It may not even be the right Chapter for your situation.
The complexities of your situation can trip you up, and one mistake can mean facing a dismissal of your bankruptcy case, foreclosure, or worse.
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