Last year I wrote about reverse mortgages and New York bankruptcy, but a recent article in the American Bankruptcy Law Journal adds more depth to the “intersection” between reverse mortgages and bankruptcy. It has a handful of lessons that New York homeowners (and their heirs) might want to know.
First, though, is a reminder as to what a reverse mortgage is. Traditionally, homeowners borrow money to purchase homes and pay down their mortgages with their current incomes. Once they do so, they have equity in the home—an asset. There are situations in which homeowners (at least 62 years old) might want to tap their home equity without selling the home. A reverse mortgage usually gives a homeowner an amount of money each month that they can use to purchase whatever they’d like. The catch is the money must be repaid either with future monthly payments back to the lender or after the home is sold. Often, the sale occurs after the death of the homeowner.
So what does the American Bankruptcy Law Journal article add? A few things. Principally, it distinguishes the circumstances in which a homeowner might prefer a reverse mortgage to bankruptcy. In particular, there may be instances where seniors might want to borrow home equity to pay off debts rather than discharge them. For example, a homeowner who owes a nondischargeable Parent PLUS loan or whose home equity can’t be fully protected by a homestead exemption might benefit from a reverse mortgage.
On the other hand there are times in which a reverse mortgage can run into problems that bankruptcy filing can solve. The article discusses homeowners who fail to pay property taxes or insurance fees, which can trigger an acceleration of the loan repayment and foreclosure. Bankruptcy can allow debtors to cure those breaches, pay off the remaining balance, or at least halt the foreclosure thanks to the automatic stay. Foreclosure can follow other reverse mortgage maturity events. These could be the homeowner dying or not living in it for 12 months. Here again, bankruptcy can halt a foreclosure.
Finally, the article addresses what happens to homeowners who after taking out a reverse mortgage still face unpayable debts. The value of bankruptcy as an option depends mainly on the remaining home equity and the available exemptions. New York offers a fairly strong homestead exemption, so homeowners might find bankruptcy a preferable option. Note that reverse mortgage payments do not count as current monthly income for debtors considering whether they qualify for chapter 7 or must take the means test.
The American Bankruptcy Journal article can be found here.
Reverse mortgages get a lot of bad press, especially because they’re directed towards older Americans. If you or a loved one took out a reverse mortgage and repaying it has become difficult, then talking to an experienced New York bankruptcy lawyer can help you determine whether bankruptcy can work with it or against it.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy lawyer Bruce Weiner for a free initial consultation.
