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 wanted to contact an expert in the field of reverse mortgage loan servicing to obtain additional information we could pass along.

Illustration showing a classroom presentation explaining how bankruptcy can affect a reverse mortgage, with older homeowners learning about Chapter 7 and Chapter 13 rules.

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 there is a myth about reverse mortgages and bankruptcies – that many believe the lender would immediately call the loan due and payable upon notification of a bankruptcy.  He stated that this was not the case.

The servicing agent receives notice of the filing and, in turn, sends it to their attorneys to file a “Proof of Lien,” which protects the reverse mortgage lenders interest in the property during the bankruptcy proceeding.

There are other steps the servicer must complete before the bankruptcy is dismissed or discharged, but calling the loan due and payable is different.


How Bankruptcy Can Affect Your Existing Reverse Mortgage

While the servicing company does not provide the courts with an accounting of any remaining funds available to 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 learn they can obtain additional funds only after the bankruptcy is complete.

This is another area that reverse mortgage borrowers should discuss with their attorneys before they file.  But it is comforting to get the facts rather than the myths about bankruptcies and existing reverse mortgages.

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


Effects of Reverse Mortgages Bankruptcy Types

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.
This table includes:
The type of bankruptcy (Chapter 7 or Chapter 13).
The general impact a reverse mortgage might have on each bankruptcy type.
Key considerations or factors that might influence this interaction.
The actual impact can vary greatly based on individual circumstances, and this table serves as a general guide. For specific legal and financial advice, it's crucial to consult with a bankruptcy attorney and/or financial advisor familiar with both reverse mortgages and bankruptcy laws.

FAQs

Q.

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

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

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.
Q.

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 ensure every borrower receives every dollar due under the loan terms.
Q.

Does a reverse mortgage protect you from creditors?

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

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.
Q.

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 that affect your life, including documents that stop your income flow or access to cash.
Q.

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 the new lender will use the same servicer – there aren’t that many contract servicers for reverse mortgages, so that you may wind up with the same company).

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