There is no shame in being in a bad place financially. Often, there are extenuating circumstances that can drive you into a corner, be it a sickness in the family or a blow by the quickly changing economy. If you find yourself with no escape from a financial standpoint, declaring bankruptcy may be the only option out there. If you are receiving money from a reverse mortgage, you will undoubtedly have questions pertaining to how everything will play out.
The Popular Myth
When you declare bankruptcy, all lenders who you are in debt to call their loans due and payable immediately. It is frequently assumed that upon declaring bankruptcy, your reverse mortgage will be treated similarly by calling it a due loan. This is simply untrue. As you probably know, reverse mortgages are paid back upon death or leaving the residence for more than 12 months at a time. This clash creates a great deal of confusion.
What actually happens, then, when you declare bankruptcy while getting payments for a reverse mortgage? From a debt standpoint, not much. The agency responsible for your reverse mortgage will receive notification, and their ownership of your equity will be honored when proceedings are done. Basically, although your servicer will have to take a few precautions and steps, they will not, in most any case, call the loan due and payable.
What About the Payments?
There are some ramifications of filing for bankruptcy with regard to reverse mortgages. Many people who are on the verge of bankruptcy plan to file bankruptcy and then ride their reverse mortgage payments through the storm. This plan sounds very pragmatic; however it is not possible. Once you file for bankruptcy, you are officially ineligible to receive payments via your reverse mortgage. This unfortunate fact is because of the nature of bankruptcy to begin with.
Bankruptcies work by the bankrupt persons declaring that they are unable to repay debts that they already owe. Debts can be forgiven, however there are massive implications on your credit rating. For these reasons, bankruptcies are contingent upon the understanding that you will incur no new debt during the period of bankruptcy. From a legal standpoint, it makes complete sense that you cannot further indulge in the exact activity that got you into trouble in the first place. Although it is a strikingly different type of loan, the underlying mechanics still get in the way.
It should be understood that there is no substitute for advice from an actual lawyer. A lawyer can examine your individual case and contract with your reverse mortgage broker, and consequently advise you on the best possible course of action as well as if the aforementioned rules are applicable and will uphold in your situation. While these rules are generally true for most contracts, from time to time there have been reports of contracts and agencies that differ slightly; if you are caught off guard, these changes could mean the difference between you maintaining ownership of your house and not maintaining ownership of your house.