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.
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!
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