Yes, but you must consider all of the ramifications of filing bankruptcy upon your unique financial situation before you file. If you find yourself in need of a mortgage and foreclosure attorney in Philadelphia, contact the Law Offices of David M. Offen at (215) 625-9600.
What is a reverse mortgage? Seniors over the age of 62 who own their home outright or have significant equity in their home often tap into that equity by taking out a reverse mortgage. A reverse mortgage provides those homeowners with monthly income from their lender, typically for their lifetime, and they can stay in their home.
If you are one of these seniors, what happens if your bills become too much to handle, or you fall behind on your car or utility payments? It might occur to you that filing bankruptcy is an option. However, there are some situations in which bankruptcy and a reverse mortgage are compatible, and many situations where they are absolutely not. Following are the primary considerations when you have a reverse mortgage and are considering bankruptcy in PA.
1. Why do you think you need to file bankruptcy in PA?
What type of debt do you have? Credit card bills? Medical debt? Personal loans? These can easily be taken care of in a Chapter 7 bankruptcy filing, however, there will be an effect on your reverse mortgage.
Most people have the type of reverse mortgage that flips equity in the home into a monthly payment to the homeowner from the lender. The thing is, the lender cannot make those monthly payments to you while your bankruptcy case is active. If you wanted to file a Chapter 7 bankruptcy case, you would have to have about 6 months’ worth of expenses saved up to survive that period.
Now, if you are behind on a car loan and you need a way to pay the arrears to the lender and keep that car, filing Chapter 13 bankruptcy is the way to go as long as you can make the regular monthly car payment outside the Chapter 13 plan, and pay a monthly amount to the Chapter 13 trustee to pay your car lender. However, a Chapter 13 case lasts either three or five years — few people have that amount of money saved up and could go without their monthly reverse mortgage payment.
2. What is your property worth, and what is the reverse loan balance?
This information is crucial, as you are likely asking this question because you want to protect your home!
Typically, when you take out a reverse mortgage there must be at least 50% equity in the home — meaning, you only owe half of what the property is worth. Depending upon the value of your home, it may be difficult to protect that amount of equity from seizure by the Chapter 7 Trustee with any applicable exemptions.
The timing of a bankruptcy filing matters. If you took that reverse mortgage out some time ago, the loan balance will have increased and the amount of equity decreased, making it easier to protect your home in bankruptcy.
If home values increased since you took the reverse mortgage out, you could run into the same problem — too much equity to protect. But if home values have decreased, then it might be easier to file bankruptcy and protect your home with a bankruptcy exemption.
Property value and reverse mortgage loan balance are two of the crucial bits of information you’ll need to determine whether bankruptcy is for you. Ask your lender for a document called a “10-day pay-off,” which gives you your loan balance to take to your attorney consultation.
3. What type of reverse mortgage is it?
Look at Your Reverse Mortgage – What are the Terms?
Depending upon the type of reverse mortgage you have and its terms, you may be able to protect your home in Chapter 7 bankruptcy even if it looks like the amount of equity you have in it exceeds available exemptions.
How is this done? Your lender files a document called a “proof of lien” and you may be able to reaffirm the mortgage debt and keep the house in your Chapter 7 filing.
Some reverse mortgage agreements require you to surrender your home to your lender if you file bankruptcy in PA. Other agreements provide that the lender can end the reverse mortgage and retain the lien on your property. You or your attorney should review your reverse mortgage documents very carefully to determine the effect bankruptcy will have on your reverse mortgage.
What is the Amount of Your Monthly Reverse Mortgage Payment?
If you are considering filing under Chapter 7, you will need to determine if you will pass the means test. This is the test that weighs your income with some designated expenses and assets and determines if you are eligible to file Chapter 7.
The monthly reverse mortgage payments you receive are considered income for the purposes of the means test. Do you receive too much to qualify? Perhaps on its face your income is too high to file under Chapter 7, but the means test also takes into consideration certain necessary expenses — medically necessary expenses included. Your attorney can look at all aspects of your financial situation and determine whether you are eligible to file Chapter 7.
In some cases, the reverse mortgage company will dispense the money to you in one lump sum.
How We Recently Saved a Client’s Home
An older gentlemen came into see us. He had taken out a reverse mortgage. As part of the agreement, he remained responsible for paying the property taxes and homeowner’s insurance on the home, but he failed to do so.
After 2 years, the mortgage company started a foreclosure proceeding on the reverse mortgage. The homeowner had no savings and the mortgage company refused to allow him any time to get together the past-due monies, which totaled over $11,000.00.
During his initial consultation with our attorneys, the client indicated that he wanted to spend the rest of his living years in this house and asked what his options were. We advised him that we could help him file a Chapter 13 bankruptcy case to give him time to make up the missed real estate tax and homeowner’s insurance payments.
Our bankruptcy lawyers filed a Chapter 13 case for him and gave him five years to get caught up on the missed and real estate tax and homeowner insurance payments. The homeowner’s Chapter 13 plan proposed that he make a payment every month to a Chapter 13 trustee and he resumed paying the real estate taxes and the homeowner’s insurance as those bills became due. Our client’s plan was approved by the court and he was able to save the house, which he had owned for many years prior to taking out the reverse mortgage. An unexpected benefit for our client was that several personal loans he had taken out were discharged as unsecured debt!
Every situation is unique – Get help in making this decision before filing bankruptcy with a reverse mortgage in PA.
Consult with a Philadelphia reverse mortgage attorney at The Law Offices of David M. Offen. We can help you weigh your options and make the right decision for you and your financial situation and goals. Your initial consultation is free!
We will look at your reverse mortgage documents, your other income, your expenses, your assets, the value of your home, and the loan balance and discuss bankruptcy options as well as alternatives to bankruptcy with you. Let us help you get a fresh start!