A reverse mortgage is when a homeowner who owns a property free of any other mortgages and is at least 62 years old borrows money against the home’s equity. It’s “reverse” in the sense that the home’s equity decreases as the money is paid out to the homeowner instead of rising with each mortgage payment. Eventually, the homeowner is expected to make monthly payments or sell the home to repay the bank. Reverse mortgages’ stated purpose is to allow older Americans who have little income to use their equity for consumption purposes.
Whether they work as intended is disputable, and there are legitimate fears that a reverse mortgage can lead a homeowner to New York bankruptcy for a few reasons:
One, reverse mortgages can come with high fees, and interest on the unpaid balance can accumulate. Although, they sometimes cannot rise higher than the value of the property. At some point, however, the lender expects to make a profit on the loan. Because homeowners will often no longer be working, it usually won’t be feasible to file a chapter 13 bankruptcy, and homeowners might need to sell the home.
Two, the full balance of a reverse mortgage can become due under several circumstances: the borrower sells the property; moves out for 12 months; fails to pay property taxes or homeowner’s insurance; or dies. The first circumstance is probably the easiest to handle, since it largely reflects the benefit of a reverse mortgage: tapping equity to pay for present consumption rather than using it for future saving. The next two situations can lead to insolvency by the homeowner, which might require a bankruptcy filing, while the third can result in the homeowner’s probate estate having less equity to satisfy other debts.
Three, even if their purposes are to help elderly homeowners, reverse mortgages have a reputation for being scam financial vehicles. Usually this involves handing the mortgage proceeds to a third party and never paying the homeowner. Being the victim of a scam can also lead to a bankruptcy filing.
There can be times when a reverse mortgage by an honest broker can help homeowners, like paying for a vacation a few years before a sale or helping a family member through medical problems, but they do have New York bankruptcy implications homeowners (and sometimes their heirs) should be aware of.
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 New York bankruptcy attorney Bruce Weiner for a free initial consultation.
