One topic that frequently comes up in my conversations with Indiana bankruptcy clients is mortgages, and how foreclosures on mortgages relate to bankruptcy. In recent years, with a greater number of seniors visiting my four bankruptcy law offices around the state of Indiana, I’m beginning to get quite a number of questions about reverse mortgages and about the way those reverse mortgages relate to bankruptcy. Sometimes I’ll learn that clients took out a reverse mortgage years ago, and have drawn down almost all their equity just to keep up with expenses. They are in my office because they have run out of alternatives to bankruptcy.
By way of review, a reverse mortgage converts home equity into cash. Homeowners age 62 or older who have paid off their mortgage or have only small balances remaining are allowed to borrow against the equity in their home. Many seniors who would not have had enough income to qualify for a second mortgage are able to qualify for a reverse mortgage, because reverse mortgages do not require repayment as long as the borrower is living in the home. The bank gets repaid only when the house is sold. The size of the loan is determined by the borrower’s age, the interest rate, and the home’s value. The older the borrower at the beginning of the transaction, the greater percentage of the home’s value is available on a reverse mortgage loan.
Seniors who take out reverse mortgages choose among three basic ways to receive the money. They can have a line of credit from which they draw as needed; they can opt to receive a fixed monthly payment for a period of years; they can receive a smaller fixed payment for as long as they live.
As I explained in my earlier blog, What Happens To A Home In A Chapter 7 Bankrukptcy?, when a homeowner files Chapter 7, some of that individual’s assets might be sold by the bankruptcy trustee and the proceeds used to pay creditors. If the debtors’ equity in the home doesn’t exceed the exemptions our state allows, they can keep their home.
When a bankruptcy is filed, the situation becomes more complicated with a reverse mortgage, and it’s crucial that debtors obtain experienced legal advice. Most important to remember, though is that the filing of a bankruptcy itself is NOT a default under the reverse mortgage agreement, and therefore the bankruptcy will not automatically lead to foreclosure on the mortgage. The remaining equity in the home that can be accessed through the reverse mortgage will be considered under the exemption rules (I was involved in drafting the exemptions portion of Indiana’s bankruptcy law). In a Chapter 13 bankruptcy, where there is a three-to-five year debt repayment plan, the remaining payments to the homeowner will be taken into account for the plan.
As I’ve often repeated, each bankruptcy client’s situation is different, and designing just the right strategy for each situation is what being an experienced bankruptcy attorney in Indiana is all about for me.