Reverse mortgages are unique tools that may enable individuals over the age of 62 create liquidity from equity in their primary residence while continuing to live there. Under the federally insured Home Equity Conversion Mortgage program, borrowers must be over age 62 and have substantial equity in their homes and have a small amount of outstanding liens on such property. The borrower’s credit worthiness is not at issue since this type of lending is based on the equity in the property.
Once the borrower under a reverse mortgage passes away, no longer lives in the home for more than one year, or the contract matures, the borrower’s heirs or the borrower’s estate will owe the lesser of the loan balance or the value of the property. Further, the property may be conveyed to the lender and nothing more will be owed.
When a borrower under a reverse mortgage files a chapter 7 or chapter 13 bankruptcy, it is not an “event of default” that automatically requires that the entire outstanding amount under the reverse mortgage be paid in full or that the house be conveyed to the mortgage company immediately. However, the lender may not be obligated to continue making monthly payments to the borrower or the lender may freeze any open lines of credit that the borrower is drawing on under the reverse mortgage. Once permission is granted by the bankruptcy court to allow the resumption of monthly payments under the reverse mortgage agreement, the lender may resume making monthly disbursements to the bankrupt borrower.
After a chapter 7 bankruptcy is filed, there is no reaffirmation agreement that will need to be signed and/or filed as there is never personal liability under the terms of a reverse mortgage. Therefore, there is nothing to reaffirm.
During the course of a chapter 13 bankruptcy and upon court permission, payments to borrowers may resume. Chapter 13 also provides an outstanding tool to cure defaults under reverse mortgages. Such mortgages generally require the borrower to maintain homeowner’s insurance and pay the real estate taxes as they come due. If the borrower defaults and the lender calls the mortgage due/accelerates the mortgage, chapter 13 allows the borrower to cure the default over a 3 to 5 year period pursuant to 11 USC § 1322(b)(5). 1
If the borrower passes away and an heir or the estate of the borrower wishes to retain the property, so long as the property is not the primary residence of the heir, such heir(s) may file a chapter 13 themselves and over a 3 to 5 year period retire the entire amount due to the lender.2
Tara Twomey of the National Consumer Law Center has created a wonderful, in-depth article regarding reverse mortgages in bankruptcy and her article may be found at: http://www.abi.org/abi-journal/reverse-mortgages-in-bankruptcy
1 In re Boudreaux, 2010 Bankr. LEXIS 777 (Bankr. E.D. La. Feb. 24, 2010)
2 11 USC § 1322(b)(2), (c)(2)
US Supreme Court issues ruling in Harris v. Viegelahn
On May 18, 2015 the Supreme Court issued a ruling faced with the question of; what happens to money paid by Debtors in their chapter 13 to the chapter 13 trustee once they convert their case to a chapter 7?
The Court ruled that any post-petition payments paid to the chapter 13 trustee post-conversion must be returned to the Debtors. The Court stated that Debtors have an absolute right to convert their case to chapter 7 and that as of the moment of the conversion, the chapter 13 trustee no longer has any authority to distribute the Debtors' money.
As a result a number of chapter 13 trustees have implemented new rules requiring Debtors' counsel to notify the chapter 13 trustee immediately upon converting a case to chapter 7. Trustees are stating that; should Debtors' counsel fail to notify the chapter 13 trustee of a conversion prior to the chapter 13 disbursing the Debtors' money to creditors, it will be incumbent upon Debtors' counsel to recoup the money disbursed to creditor post-petition and post-conversion.
Sixth Circuit issues ruling (In re Underhill - 13-4195)
On September 10, 2014 the Sixth Circuit issued a ruling clarifying what law suits may or may not become property of a bankruptcy estate. In this case the Debtors operated a business when they filed a chapter 7. Subsequent to filing the case the Debtors, as representatives of the business sued another company for tortious interference with a contract. The Debtors recovered a substantial amount of money in this law suit. A creditor of the Debtors' business sought to have the settlement funds turned over to the Chapter 7 Trustee for disbursement to the Debtors' creditors. The Sixth Circuit ruled that since the Debtors' cause of action arose after the chapter 7 was filed that the proceeds from the law suit were not property of the bankruptcy estate and thus not available for distribution to creditors by the chapter 7 trustee.
Sixth Circuit issues ruling (In Re Baud)
During March, 2011, the Sixth Circuit issued a ruling in the Baud case that requires all chapter 13 cases with above median income debtors to have a projected length of 60 months. The Court further reaffirmed that below median income debtors need only be in a case for a minimum of 36 months but may take up to 60 months to pay back certain debts.
Sixth Circuit issues ruling (In re Shaw)
The bankruptcy amendments of 2005 (BACPA) created a class of secured claims concerning automobiles (910 claims) that the Sixth Circuit ruled were not modifiable under 1322(b)(2) even though the plain language of 1325(a) seems to indicate the bankruptcy judge has discretion to do so. The Ninth Circuit subsequently reviewed the same issue and ruled the bankruptcy judge does have the discretion to permit modification of such automobile claims.
As of Mach 27, 2013 the Ohio legislature amended the exemptions applicable to bankruptcy law. A link to the exemptions is below. Most notably, the homestead exemption is now $132,000. This means that Debtors who own their homes free and clear or have substantial equity in their primary residence are now able to protect that equity from creditors and/or trustees.
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