mortgage

Will bankruptcy rescue reverse mortgage?

Justin HarelikDear Bankruptcy Adviser,
My father recently passed away. He had a reverse mortgage on his home. I inherited the house when he passed away. The reverse mortgage company wants their money now that my father is gone. There is no way I can pay it. My father used almost all of the equity, and the lender wants the balance, but the house still has some equity. We have lived here for 45 years. Can I file bankruptcy if the house is in my name?
-- Elizabeth

Dear Elizabeth,
I am sorry for your loss. I hope the loss of your father will not be compounded by the loss of your home of the past 45 years. Unfortunately, you are facing an uphill battle.

Many seniors take out reverse mortgage loans. And from what I understand about reverse mortgages, they are great for the current owner of the property -- just not so great for the owner's heirs. The purpose is to allow the owner to stay in his or her home without having to pay the mortgage (principal or interest), and the owner can take money out of the home to spend.

The loan is paid back only when the owner dies or sells the home. The lender takes the risk that the property value decreases or that the owner lives longer than anticipated.

In your case, your father passed away, and you want to keep the home. Your ability to keep the home is definitely in jeopardy because of the reverse mortgage. Once the bank learns that the homeowner has died, the heirs or those who inherit the home must act quickly. Unless your father's spouse is still alive, was a co-borrower on the reverse mortgage loan and is living in the home, you have six to 12 months to complete one of the following three options.

Refinance the property. Try refinancing with the current lender or a new lender into a conventional loan. This will allow you to start repaying the current principal and interest.

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Pay off the current loan. Obviously, this option will be very difficult or impossible for you, but it is still an option. If you are looking to try this, you could consider borrowing money from someone else in the family. Or, you could possibly borrow from a retirement account if it wouldn't put your retirement in jeopardy.

Sell the property. The current loan balance may be less than the value of the property. So you would not want to compound the loss of the property with the loss of any equity. Six to 12 months is enough time to sell the house. The bank usually will give you the extra six months when trying to sell the property.

Bankruptcy is not an option to keep the house and eliminate the balance. If the lender has a valid lien against the home, bankruptcy will not wipe out that lien. However, there are many attorneys now filing lawsuits against lenders for poorly or illegally drafted loan documents. If this is the case with your lender, you might try this approach. While it won't eliminate the loan, it might push the lender to work out a loan repayment or refinance. You would need to find a competent local attorney to review this option.

Finally, the bank cannot merely take back the property and kick you out the next day. It must still comply with the foreclosure laws in the state in which you reside. But you must act quickly. Six months can fly by, and the lender has no interest in waiting to recover its investment.

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To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "Bankruptcy" as the topic. Read more Bankruptcy Adviser columns and more stories about debt management.

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