By Ryan C. Wood
This is unfortunately a question that is coming up more and more these days. Yes, you can file bankruptcy if you have a reverse mortgage. I am not a fan of reverse mortgages. First please know the terms of the reverse mortgage precisely before agreeing to anything. Please try every way to stay in your home before agreeing to a reverse mortgage. Why not refinance? Why not get help from a family member? A heir should be motivated to make sure the house stays in the family right? Hopefully your family is normal and can communicate about such things openly and honestly. Sadly many families are not able to do this and the family/team suffers financially generation after generation. If your family cannot communicate about such things generational wealth is extremely difficult to create. I digress.
Reverse mortgages are designed to eat up all your equity. That is the bottom line. Be careful and know the terms.
The Federal Trade Commission Has Warnings About Reverse Mortgages
One rule of thumb I have is when the Federal Trade Commission has warnings about something on their website my clients should stay away from such things. The FTC has an entire page called SCAMS dedicated to alerts about many scams and consumer products that are questionable. The FTC has warnings about all kinds of scams including: credit report repair, debt consolidation, debt settlement, reverse mortgages, imposter scams, social security scams, student loan scams and mortgage scams. It goes on and on. https://www.consumer.ftc.gov/articles/0192-reverse-mortgages#be Just be careful.
Yes, You Can File Bankruptcy If You Have A Reverse Mortgage
So you have a reverse mortgage and it did not solve all of your money problems like the salesperson told you before you entered into the reverse mortgage. Yes, I am not surprised. Like all bankruptcy cases that involve real property the value of the real property and secured debt recorded against the real property are extremely important to absolutely know to the penny. Under the current circumstances how much equity does the bankruptcy filer actually own? After deducting cost of sale and potential property gains taxes what is left? Can what is left, if any, be protected by applicable exemptions to protect of exempt the remaining equity?
Chapter 7 Considerations
Again the amount of equity is key. What is the real property worth to the bankruptcy filer at the time the case is filed? Your bankruptcy attorney and you must take a hard look at equity before ever filing a chapter 7 case when real property is involved. Chapter 7 is the liquidation chapter. Any property of yours that cannot be exempted/protected becomes property of the bankruptcy estate and can be sold/liquidated for the benefit of your creditors. Some bankruptcy attorneys refuse to file chapter 7 cases involving real property to eliminate the possibility of you losing your home. A chapter 13 is filed instead to make sure this never happens. More to come on chapter 13 below.
Back to chapter 7 and California exemptions. We have the CCP 703 and CCP 704 exemptions. The main difference between the two are the homestead exemptions. CCP 704 exemptions have the largest exemptions to protect equity in your primary residence. I am not going to go into a ton of detail about the ins and outs of the CCP 704 homestead exemptions in this article, but there are catches to using the CCP 704 exemption that must be taken into account when filing chapter 7 and protecting a primary residence with the homestead exemption. Be careful; period. In theory or depending upon the terms of your reverse mortgage there may not be any equity in your home. Terms of reverse mortgages can vary widely given it is a sold product. It is designed to provide you with money now in expense of your existing equity generally with terms favorable to the reverse mortgage company and not you.
A chapter 7 case worst case scenario is you are wrong about the value of your real property. The value is much higher than you believe and the chapter 7 trustee seeks to sell your real property when your intention was to keep the real property. Chapter 7 is normally filed voluntarily by you to seek relief from your creditors. The chapter 7 trustee will merely be doing their job by seeking to sell your not protectable assets for the benefit of your creditors. That is the deal.
Chapter 13 Bankruptcy Considerations
As mentioned previously chapter 13 is a much safer route to take given it is not the liquidation chapter. You will have a chapter 13 plan of reorganization in which you make monthly payments to the chapter 13 trustee to satisfy your obligation to your creditors pursuant to the Bankruptcy Code. Your assets are not in jeopardy of being sold out from under you. Chapter 13 plans vary widely depending upon your income, expenses, assets and debts. If you have any question as to the value of your real property and never want it sold this is the way to go. The attorney fees will be much more than the chapter 7 and there is a chapter 13 trustee fee involved, but knowing you will not lose real property you want to keep should be priceless.
An issue that seems to continue to arise is about property tax and insurance when filing a chapter 13 and reverse mortgages. Are the property taxes and insurance paid directly by the homeowner or the are the property taxes and insurance paid by or via the reverse mortgage company? A claim in the chapter 13 case might be filed for unpaid property tax or insurance that was not part of the original equation. This seems to be the most common unforeseen issue that arises. Hopefully you know the terms of the reverse mortgage and know the amount of equity that is the homeowners at the time the chapter 13 case is filed. If the real property is continuing to increase what is the result? How much is the amount owed in the reverse mortgage? How much does it increase each month or year?
If you later want to sell the real property after your chapter 13 plan is approved you can do this. A recent Ninth Circuit Bankruptcy Appellate Panel case made this more clear. Chapter 13 provides the flexibility to keep real property while still obtaining relief from creditors. See In re Richard L. Black; BAP No. NV-18-1351-FBH; Bk. No. 2:14-bk-12402-ABL.
Bottom Line Yes, you can file for bankruptcy protection when you have a reverse mortgage. Please know the terms of the reverse mortgage before agreeing to anything. Hopefully the reverse mortgage will in fact solve the financial problems you are having and there will be no need to seek relief the Bankruptcy Code provides.
