Homeowners who are 62 years old or older may decide to tap into their home’s equity without having to sell their property. This is done by getting a reverse mortgage on the property. It can be a financial lifeline in retirement, but there are times when it can become problematic.
One time when there may be a problem with having a reverse mortgage is if the homeowner decides to file bankruptcy. The way that bankruptcy affects the reverse mortgage depends on the type of bankruptcy that’s filed and how the loan is structured.
How does the type of bankruptcy affect a reverse mortgage?
In a Chapter 7 bankruptcy, there’s a chance that the trustee may decide to sell the home to pay off creditors. For a homeowner who has a reverse mortgage on the property, there’s a chance that there’s not enough equity in the property to make it worth the trustee’s time to try to sell it.
In a Chapter 13 bankruptcy, debts are reorganized instead of discharged. Because of this, homeowners can typically continue making property tax and insurance payments and keeping the home.
Once a homeowner files any type of bankruptcy, they typically can’t receive any payments from the reverse mortgage. This is because receiving payments similar to these would require the approval of the bankruptcy trustee, which is highly unlikely during the bankruptcy process.
Another consideration is that a bankruptcy doesn’t cancel the reverse mortgage. The homeowner must still meet all loan obligations, including maintaining the property and paying taxes and insurance. If they fail to do so, they can still face foreclosure.
Bankruptcies and reverse mortgages are both complex financial tools. Understanding how they will interact with each other in a specific case often requires the homeowner to seek the assistance of someone familiar with these circumstances.