WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a non-recourse loan that is available only to people:
- Over the age of 62
- Who have a free and clear house, or
- A house with only a small amount of mortgage debt
The big difference between a reverse mortgage and a regular mortgage is that the bank makes payments to the borrower in a reverse mortgage. In a regular mortgage, the borrower makes payments to the bank.
In a reverse mortgage, the payments count against the debtor’s equity in the house until all of the equity is gone. The amounts that the bank has disbursed to the borrower continue to accrue interest.
When the borrower moves, sells the house, or dies, the borrower or his heirs must either give the house to the bank, or pay the sale proceeds to the bank.
Unlike traditional mortgages, a reverse mortgage does not require the borrower to demonstrate income to repay the loan, and is based solely on the equity in the borrower’s house.
This means that the bank will be careful to pay out less money than the house is worth. If the bank paid out more money than the house was worth, then the bank would lose money.
WHAT HAPPENS IF I FILE BANKRUPTCY WHILE IN A REVERSE MORTGAGE?
Some lenders will stop the monthly payments from a reverse mortgage. They do this on the theory that the equity in the house may be an asset that could be sold to pay creditors.
- In Minnesota, equity in your homestead is exempt to over $300,000, so your equity will probably be exempt
- If the equity is exempt, then you get to keep it after filing the bankruptcy
Usually the lender will resume the payments after a few months, once they have been convinced that the equity is in fact exempt.
CAN BANKRUPTCY STOP A REVERSE MORTGAGE FROM FORECLOSURE FOR UNPAID PROPERTY TAXES?
One of the dangers of a reverse mortgage is that the lender has the power to foreclose if the borrower does not keep current with property taxes. Some retirees with financial difficulties have trouble paying their property taxes, and fall behind.
You can fix this and save your house by filing a Chapter 13 bankruptcy to pay the property tax arrears over 3 to 5 years. This usually results in a relatively cheap repayment plan.
WHAT TO DO NEXT
If you’ve got a reverse mortgage, or are thinking of taking one out, and are considering filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota, then why not not speak to us now at 612.824.4357?
We’ll give you all the help and advice you need.
We’re looking forward to helping you.