In general, reverse mortgages are treated in bankruptcy the same as any other mortgages, but "in general" isn't enough in this situation. As they say, the devil is in the details.

Reverse mortgages can be valuable to many people, in particular to people on a fixed income who have significant equity in their home and who need additional monthly income. Typically, a reverse mortgage provides a line of credit that either allows loans to be taken periodically or pays a set amount per month (from loans taken) for a period of time which may be the remainder of the person's life. As the person receives money from the lender, the person's equity in the home is reduced by the increased amount borrowed.

If a person with a reverse mortgage files Chapter 7 bankruptcy, several issues pop up.

• What is the remaining equity in the home? Whatever it is, it's treated as any other home equity and must be protected by available exemptions (a very important subject in bankruptcy) or the home may be lost to creditors. You must get an accurate current valuation of your home and then obtain from the reverse-mortgage lender the current mortgage balance on the property.

• The unused line of credit is not an asset in the bankruptcy, to be taken by the trustee for creditors, in spite of information to the contrary that seems to get published on the internet.

• The reverse mortgage agreement may contain provisions that the amount owed becomes due and payable when filing bankruptcy, which would mean that the lender could foreclose and take the house. If the agreement doesn't contain such a clause, it nevertheless may provide that the remaining credit line (if any) will be closed upon filing bankruptcy.

• If the payments from the lender continue after filing bankruptcy, the Chapter 7 trustee might tell the lender to stop disbursing money to the debtor because those payments reduce the equity in the property which is property of the bankruptcy estate.

So the answer to the original question is a strong "maybe" and an even stronger "be very careful". Filing a Chapter 7 bankruptcy when you have a reverse mortgage requires very careful examination and evaluation.

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6 thoughts on “Can I file a Chapter 7 bankruptcy with a reverse mortgage and keep my home?

  • April 26, 2015 at 11:12 am

    I am in the process of bankruptcy, with my trustee meeting on Monday. I have also applied for a
    reverse mortgage. In Arizona they allow you to have $150,000.00 equity in your home. My appraisal may turn out to be about $350,000 & my present mortgage is $200,000.00 (which is 60% of 350000 which is the % the reverse mortgage allows). I would like to pay off my mortgage with the reverse mortgage, so the new lender would be giving me a lump sum of $200,000.00. Can the bankruptcy court take this lump sum, even though its purpose is to pay off my present mortgage?
    (the reverse mortgage company doesn't not care that I am in bankruptcy).

    • April 26, 2015 at 11:22 am

      First, you should be asking that question of your own bankruptcy attorney, not of me in California over the internet. I simply can't research and answer a complex question like that for you. Don't have your own bankruptcy attorney and instead are doing it yourself? Very big mistake, and you need to retain an experienced bankruptcy attorney ASAP.

  • September 4, 2015 at 9:31 am

    I have had a reverse mortgage a little over a year. I have about $12,000.00 in outstanding debt.
    If I file bankruptcy, can I keep my home? My home was paid for when I got the reverse mortgage.
    The balance on it is around $90,000.00.

    • September 4, 2015 at 3:48 pm

      Virginia, if you read the article above you know that there are many factors to consider about your reverse mortgage and bankruptcy. The best thing for you is to consult with an experienced bankruptcy attorney in your area so you can properly evaluate your situation.

  • November 4, 2017 at 1:01 am

    i have a reverse mortgage my houes value 225000 i take 109000 total can i file a chapter 7 bankruptcy and still live in home when i take out the reverse my house was paid in full what can i do

    • November 4, 2017 at 7:49 am

      According to the numbers you provided, you have $116,000 worth of equity in your house ($225,000-$109,000). In a Chapter 7 bankruptcy, you would need to be able to "exempt" that $116,000 to prevent the trustee from selling your home (that's a simplified version). In California, you might have $75,000, $100,000, or $175,000 worth of exemption to cover that equity, depending on your age and other circumstances. If you live in another state, the available exemption would be different.

      Also, if you read the above article, you'll see that there are other factors to consider, plus the normal factors that go into any consideration of filing a Chapter 7 bankruptcy.

      Do yourself a big favor and get a consultation (many are free) with an experienced bankruptcy attorney in your area.


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