Reverse Mortgages in Michigan Chapter 7 or Chapter 13: Effects & Pitfalls
Reverse Mortgages: What Are They?
A reverse mortgage is a lien upon real estate the same as any other kind of mortgage. Both an "ordinary" mortgage and a reverse-mortgage are liens against the value of the property that will affect the determination of whether the owner of the property actually has any equity in it or not. In this manner, there is no difference between the two types of liens, and a determination that a debtor has no equity in his or her real estate governs the options available for retaining the property through bankruptcy. A reverse mortgage is simply a mortgage that becomes due and payable upon the death of the homeowner who contracted the mortgage, or the voluntary vacating of the mortgaged property by that homeowner. A standard mortgage requires monthly payments; a reverse mortgage requires no payments, but the house becomes the property of the mortgagee upon death or abandonment by the homeowner. The difference between the two lies not in valuation of the property but in the chief benefit that consumers look to reverse-mortgages to receive: a line of credit. Typically, in the most common reverse-mortgage situation, a homeowner meeting certain criteria assigns a future interest in the full value of the real estate—their home, generally—in exchange for a line of credit which pays out a set amount per month for an allotted period of time, which, in many cases, particularly with regard to elderly consumers, may be the remainder of the consumer's life. It is a means for a consumer living on limited income, often, to increase their monthly standard of living without losing the benefit of the roof over their heads—at least, when it works as advertised.
Reverse Mortgages in Bankruptcy
In Chapter 7 or Chapter 13 bankruptcy, real estate subject to a reverse mortgage is valued the same way that real estate subject to other sorts of mortgages are for purposes of bankruptcy. In a Chapter 7 bankruptcy, what this means is that a home may be more or less easy to protect from liquidation (sale for the benefit of your creditors) by the Chapter 7 bankruptcy trustee depending upon the home's value. Property is "protected" in Chapter 7 by applying "exemptions" to each item of property from either the Federal Bankruptcy Code or from Michigan (or other state if the bankruptcy is being filed elsewhere in the US than Michigan, depending upon that state's bankruptcy exemption-related laws). Exemptions are bits of statute that allow certain types of property to be "exempted" or removed from the legal "bankruptcy estate" that is created by automatic legal function upon the filing of a Chapter 7 or Chapter 13 bankruptcy. The "bankruptcy estate" contains all property owned by the filing debtor, regardless of its value (or lack thereof) and regardless of its location. If a piece of property is "exempted" up to its full value, it is fully protected from liquidation, and the Chapter 7 trustee cannot seize it and sell it off for the benefit of creditors whose debts are otherwise to be totally discharged (with exceptions) in a Chapter 7 bankruptcy. With regard to real estate, depending upon the nature of ownership of the home (tenancy by the entirety, fee simple, joint title, etc.) and whether the Federal or Michigan bankruptcy exemptions are used in your case (in Michigan, we may select either the Federal or State exemptions—but not both), the value of the home that must be protected from the Chapter 7 Trustee is whatever equity there may be after the value of mortgages or other liens is taken into account. Thus, for example, a home worth $100,000 in present fair-market value with a $110,000 mortgage would not have any equity that must be exempted or protected from the Chapter 7 bankruptcy trustee. The home is fully safe in a Chapter 7 (provided there have been no irregularities with its purchase, transfer, title, etc., prior to filing). That a mortgage may be a so-called reverse mortgage makes no difference. The question of whether a home is "safe" in bankruptcy remains a question of equity value after lien encumbrances are taken into account. In a Chapter 13 bankruptcy, no property is ever liquidated. So there is no danger to the home from the Bankruptcy Court or process, period. Non-exempt or unprotected equity value in real estate or any other type of property in a Chapter 13 may increase the size your monthly Chapter 13 plan payment—but no one will take the home from you. If there is equity in a home after mortgage or reverse mortgage lien encumbrance value is considered, it simply means that unsecured creditors (who get paid last in the Chapter 13 plan payment priority scheme) must receive the value of that non-exempt equity over the 3-5 years of the Chapter 13 plan. That is, they can't get less out of your Chapter 13 bankruptcy than they would have received if you had filed a Chapter 7 and had the home (or other property) liquidated. So, you may need to pay more each month to ensure that that total amount of money remains available for the unsecured creditors at the end of the Chapter 13—but no one will take your home.
Reverse Mortgages: Problems and Pitfalls, In & Out of Bankruptcy
A reverse mortgage does carry with it some problems and pitfalls peculiar to the type of mortgage, however. Thus far, we have discussed only the Chapter 7 and Chapter 13 bankruptcy trustees and the reverse mortgage point-of-view of the bankruptcy court and bankruptcy process. The sticking-point for debtors with real estate subject to a reverse mortgage lien is whether or not the finance company providing the reverse-mortgage will continue to provide the line of credit to the consumer under the terms of the original reverse-mortgage agreement. Whether or not this is the case is determined by a wide variety of factors, such as the amount of credit remaining in the line of credit, the business strategy of the finance company when confronted by such situations, as well as others. A further issue may be specific terms in the reverse mortgage note or contract regarding the effect of filing a bankruptcy upon that particular reverse mortgage. A reverse mortgage contract may contain "ipso facto" and other clauses deeming the mere filing of a bankruptcy to be a default providing the mortgagee creditor the right to accelerate the mortgage and foreclosure. Thus, it is vital to provide your Michigan bankruptcy attorney with a copy of your reverse mortgage agreement and all other documentation prior to filing a Chapter 7 or Chapter 13 bankruptcy to ensure that, regardless of the bankruptcy court and bankruptcy trustees, you do not run into trouble from the mortgage company in your bankruptcy process. If you are considering filing for bankruptcy and are concerned about the balance of personal and business debt that you are carrying, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation so that we can discuss the best options for you.