We have recently had several borrowers who had previously obtained a reverse mortgage call and ask us what the effect would be on those reverse mortgages if they had to now 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.
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 simply is 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 prior to the dismissal or discharge of the bankruptcy but calling the loan due and payable is not one of them.
There is one thing that Mr. LaRose did caution about…
While the servicing company does not give the courts an accounting of any remaining funds available to the borrowers on their existing reverse mortgages on credit lines and under monthly payment provisions, borrowers cannot receive funds from their reverse mortgage during the bankruptcy proceeding.
This is since 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 cannot obtain any additional funds until 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 in lieu of the myth when it comes to 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 which may affect your individual circumstances!
Top 5 FAQs
Can you do a reverse mortgage while in chapter 13 bankruptcy?
You can do a reverse mortgage while in Chapter 13 under some scenarios. It takes at least 12 months of on time payments on your payment schedule and the court must approve it, but it is possible.
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 is exempted.
What happens to my reverse mortgage if my lender goes bankrupt?
If a reverse mortgage lender is no longer solvent, HUD steps in and takes over the loan. The loan has been insured by HUD to be certain every borrower receives every dollar due under the terms of the loan.
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.
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