We recently had several borrowers who had previously obtained a reverse mortgage call and asked us what the effect would be on those reverse mortgages if they had to begin a bankruptcy proceeding.

While we are not attorneys and would always advise you to seek competent legal advice from an attorney in your state, we did want to contact an expert in the field of loan servicing for reverse mortgages and get some additional information that we could pass on.

ARLO teaching how reverse mortgages and Bankruptcy works

We contacted Ryan LaRose, Chief Operating Officer of CELINK, the nation’s largest reverse mortgage sub-servicer, to ask what happens when a borrower files for bankruptcy.

Ryan told us that there is a myth about reverse mortgages and bankruptcies – that many believe that the lender would immediately call the loan due and payable when notified of such an event.  He stated that this was not the case.

The servicing agent does receive notice of the filing, which they, in turn, send to their attorneys to file what is known as a “Proof of Lien,” which protects the reverse mortgage lenders’ interest in the property during the bankruptcy proceeding.

There are some other steps the servicer must complete before the dismissal or discharge of the bankruptcy, but calling the loan due and payable is different.

How Bankruptcy can affect your existing Reverse Mortgage

While the servicing company does not give the courts an accounting of any remaining funds available to the borrowers on their existing credit lines and under monthly payment provisions, borrowers cannot receive funds from their reverse mortgage during the bankruptcy proceeding.

This is because the Bankruptcy Trustee must approve any funds the borrower receives during this time, as borrowers are prohibited from incurring new debt during the Bankruptcy period.

Mr. LaRose warns that borrowers planning to file for protection under the bankruptcy laws and then live off their reverse mortgage proceeds may be in for a big surprise when they find out that they can only obtain additional funds once the bankruptcy has been completed.

This is another area that reverse mortgage borrowers should discuss with their attorneys before they file.  But it is comforting to get the facts instead of the myth regarding bankruptcies and existing reverse mortgages.

As we stated in the beginning, this is not legal advice, though be sure to consult your attorney before you do anything that may affect your circumstances!

Bankruptcy TypeImpact of Reverse MortgageKey Considerations
Chapter 7VariesReverse mortgage proceeds may be part of the bankruptcy estate. Home equity could affect the ability to qualify for Chapter 7.
Chapter 13VariesProceeds might impact repayment plan calculations. Ongoing payments from the reverse mortgage may be considered income.



Can you do a reverse mortgage while in Chapter 13 bankruptcy?

You can do a reverse mortgage while in Chapter 13 under some scenarios.  You must have completed a minimum of 12 months on time scheduled payments and documented by the court (cannot prepay payments), and the Bankruptcy Court must approve you to enter into the reverse mortgage transaction.

What happens if you file bankruptcy after getting a reverse mortgage?

The bankruptcy will not invalidate your reverse mortgage but could interrupt your access to funds or monthly payments until the property and loan are exempted.

What happens to my reverse mortgage if my lender goes bankrupt?

Suppose a reverse mortgage lender is no longer solvent; HUD takes over the loan.  HUD has insured the loan to be sure every borrower receives every dollar due under the loan terms.

Does a reverse mortgage protect you from creditors?

The reverse mortgage has no impact on you and other creditors.

Can a reverse mortgage go into foreclosure?

The reverse mortgage does have “call events” that could result in foreclosure.  Borrowers must live in the property and pay the installments of taxes and insurance on the property when due (and any other property charges such as HOA dues).  The borrower must also maintain the home in a reasonable manner.

Does a bankruptcy trigger a default on a reverse mortgage?

Filing for protection under bankruptcy laws does not trigger a default, but it can interrupt the borrower’s ability to continue to draw on the line until the loan and the property are exempted from bankruptcy.  You should advise your attorney that you have a reverse mortgage and the loan status (whether you still have funds available to you on your line of credit).  Since additional draws may be determined as taking on additional debt, you may need permission from the court to access your line, or you may need to wait until the Bankruptcy is complete to access additional funds.  Some private programs may have terms with a call provision when the borrower files for bankruptcy, so if your loan is not an FHA-insured HUD HECM loan, it’s even more important to have your attorney review your loan documents in advance.  Any way you look at it, I recommend that your attorney review your circumstances before filing any documents affecting your life, including stopping your income flow or access to cash.

What happens if your reverse mortgage lender files for bankruptcy?

Your loan will either be assigned to HUD, or another lender will purchase the servicing rights, but either way, you can continue to remain in your home under the original terms of the Note and Deed of Trust/Mortgage.  You will be notified once the loan is transferred to a new servicer, and nothing will change in the meantime.  Then the only thing that changes is the information for the new servicer (and even then, it is possible that the new lender will be using the same servicer – there really are not that many contract services for reverse mortgages, so you may wind up having the same company).

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