Getting a reverse mortgage during a Chapter 13 and 7 bankruptcy may appear to be a complicated process; however, it is easy with the correct information. In this article, I will highlight how to get a reverse mortgage while in chapter 13 and 7 bankruptcy, including legal requirements for how Chapter 12 and 7 bankruptcy affect your application. We will examine this in a simplified manner. Understanding these things helps you choose wisely whether you need more money or want relief from the financial constraints associated with them. Let’s dive into the details and explore your options.
Legal Requirements and Criteria for Reverse Mortgages During Bankruptcy?
There are a number of legal requirements and factors that are considered when assessing reverse mortgages in bankruptcy. An explanation of these is provided below.
General Eligibility for Reverse Mortgages
- Age Requirement: Borrowers must be at least 62 years old.
- Equity in Home: A homeowner must have a lot of equity in the property, usually not less than fifty percent of its worth.
- Credit and Income: Though credit history is less critical for reverse mortgages, lenders will consider how well the borrower can manage the payment of property taxes, insurance, and the maintenance of the property.
Impact of Bankruptcy on Reverse Mortgages
Chapter 13 Bankruptcy
- Eligibility: In order to secure a reverse mortgage, the borrowers should ensure that all mortgages, liens, or debts towards the property, federal or otherwise, are all cleared. A judge must approve this arrangement. It confirms that the borrower can proceed without paying off the bankruptcy but would still expect the borrower to service the monthly dues.
- Payment Plans: In Chapter 13, the debtors plan some repayment strategies to pay the debts off within a period of three to five years without disposing of their properties. This plan will include the presence of some non-exempt equity in the house, which will also play a role in the amounts paid on a monthly basis.
Chapter 7 Bankruptcy
- Eligibility: A reverse mortgage applicant may be eligible if their bankruptcy has been dismissed or discharged before closing. No extra documentation is needed if at least one year has passed since the dismissal or discharge. However, if less than a year has elapsed or the discharge date isn’t on the credit report, additional documents (such as a court order) will be required.
- Waiting Period: In addition, if the borrower included an FHA-backed loan in the bankruptcy proceedings, the waiting period will last for as long as three years when seeking approval for a Home Equity Conversion Mortgage (HECM) or other FHA loans.
- Asset Liquidation: In the 7th chapter, it is elucidated that the execution of non-exempt assets may take place in the release of debt obligations. Nevertheless, many, if not all, equity reverses are considered safe assets, which means that they do not fall into this category.
Filing for Bankruptcy with an Existing Reverse Mortgage
- Loan Default Risks: Certain reverse mortgage agreements may contain provisions that classify the act of declaring bankruptcy as a default event, thus allowing the lender to proceed with foreclosure. Nevertheless, even in cases where the lender is seeking to foreclose on the indebtedness, it is common that the lender must first obtain a court’s permission before initiating foreclosure proceedings during the debtor’s bankruptcy protection.
- Suspension of Payments: In most instances, reverse mortgage payments are halted when a debtor is filing a bankruptcy case. Debtors are not allowed to draw from their reverse mortgage credit line until the case concludes, and any new borrowing during that period is subject to approval by the bankruptcy trustee.
How Chapter 13 & 7 Bankruptcy Affects Your Reverse Mortgage Application
The following is a discussion on the implications of filing for Chapter 13 vs. filing for Chapter 7 bankruptcy on your ability to apply for a reverse mortgage:
Chapter 13 Bankruptcy
- Reorganization Plan: Let’s put forward a repayment scheme for a period of three to five years and still keep their properties, particularly their houses.
- Foreclosure Protection: Declaring Chapter 13 bankruptcy can stop a foreclosure sale so long as the borrower follows the court-directed plan to repay the mortgage and other debts owed. In this case, all delinquent property taxes and insurance premiums will also be paid.
- Nonexempt Equity Considerations: Nonexempt home equity will be counted as an asset and will affect the monthly payment amounts under the repayment plan.
- Eligibility for Reverse Mortgage: Debt against the property and any public money owed have to be cleared for a borrower to be eligible for a reverse mortgage. This must be sanctioned by a presiding judge.
Chapter 7 Bankruptcy
- Immediate Effects: Upon filing for Chapter 7, lenders typically suspend reverse mortgage payments.
- Asset Liquidation: Liquidation of non-exempt assets can be done to settle the liabilities. In the event that the residence has equity surpassing the exempted limits, such as $35,000 in North Carolina, the bankruptcy trustee can opt to sell the residence, reimburse the excluded equity to the debtor, and use the remaining funds to settle debts with other creditors, including the creditor for the reverse mortgage.
- Eligibility for Reverse Mortgage: In the case of a borrower applying for a reverse mortgage, it is acceptable if bankruptcy has been discharged or dismissed one year prior to the closing. However, in circumstances where this period is still less than one year, there are more requirements to meet.
- Impact on Equity: The presence of substantial equity may further muddle eligibility for Chapter 7, as the trustee might see it as an asset appropriate for sale.
Step-by-Step Guide to Obtaining a Reverse Mortgage in Chapter 13 & 7
Detailed instructions on acquiring a reverse mortgage in the framework of Chapter 13, as well as Chapter 7 bankruptcies in Central Valley, are outlined below:
Step-by-Step Guide for Chapter 7 Bankruptcy
- Assess Your Equity: Upon taking into account the reverse mortgage balance, calculate your home equity. If such equity is below the exemption limit, it may not be seized by the bankruptcy trustee.
- Evaluate Bankruptcy Impact: Filing for Chapter 7 will probably stop reverse mortgage payments, but that does not erase the mortgage debt itself.
- Consult with an Attorney: Hire a bankruptcy lawyer to look over your reverse mortgage contract and make sure that there are no adverse loans, especially in cases where a bankruptcy is filed.
- File for Bankruptcy: Prepare and submit your bankruptcy petition together with supporting materials regarding assets, liabilities, and other financial matters.
- Attend Creditors’ Meeting: Attend the creditors’ meeting, where the trustee will analyze your financial position and talk about your reverse mortgage.
- Receive Discharge: Once the bankruptcy is finalized, some debts that could be discharged may be received; however, the reverse mortgage would still remain in effect unless assets have been sold and the debt settled.
Step-by-Step Guide for Chapter 13 Bankruptcy
- Determine Eligibility: To be eligible for Chapter 13 which enables you to come up with a repayment plan yet keep your property intact, you must have some form of regular income.
- Create a Repayment Plan: Work with your lawyer in formulating a repayment strategy to cover all debts, and this includes any non-exempt equity that is in your house that will need to be repaid within a period of three to five years.
- File for Bankruptcy: Submit your bankruptcy petition along with the repayment plan to the court.
- Automatic Stay: If you comply with the conditions of your repayment strategy, you will be allowed to enjoy the benefits of an automatic moratorium on any actions intended to dispossess you of your dwelling.
- Maintain Payments: To prevent being in breach of your reverse mortgage, ensure that you maintain insurance coverage and make property tax payments from the very beginning of the bankruptcy proceedings until they are finalized.
- Complete the Plan: Successfully complete the repayment plan as approved by the court, which may allow you to keep your home while addressing outstanding debts.
Conclusion
Handling a reverse mortgage during Chapter 13 or Chapter 7 bankruptcy is complex but feasible with proper strategies. Understanding legal requirements and following a structured process is crucial. As a seasoned house buyer, I’ve observed how thorough planning and professional guidance significantly impact outcomes. If you’re contemplating this option, seek expert advice and fully explore your choices. For additional information or assistance, don’t hesitate to contact me.