Bankruptcy Home Loans with reverse mortgage

Different societies will view debt quite diversely.  For the Jews, dates were set aside when debtors could be forgiven for they were “bankrupt’.  The Greek, considered to be very intelligent, did not recognize bankruptcy and therefore if a parent owed money then the family would pay through what was called “debt slavery”.  The inability to service debts had varied repercussions (www.wikipedia.com).

Bankruptcy Mortgage

What is bankruptcy?  The straight forward definition as given by Wikipedia, the free encyclopedia, is that bankruptcy is a legally declared inability or impairment of an individual or organizations to pay their creditors.

 Creditors may file a bankruptcy petition in court against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed. Sometimes, and in fact most of the times,  the debtor him/herself may initiate the proceedings in a court of law to have him/her declared bankrupt.  This is what is called voluntary bankruptcy and is filed by the bankrupt individual or organization.

Bankruptcy of the reverse mortgagor

The United States of America Constitution in Article 1, Section 8 Clause 4 allows congress to enact uniform laws on the subject of bankruptcies.  In pursuance to this, Congress enacted the Bankruptcy Code, to be found at Title 11 of the United States Code. 

Reverse mortgages, like all mortgages, have real estate as security.  The asset that is real estate will be subjected to the normal circumstances that will befall a mortgagor who has failed or defaulted to service a loan as agreed.  In determining the equity of the house, regard will be given to appraisals and any difference that will exist after the loan outstanding is paid.

Filing For Bankruptcy

The law provides in Chapter 7 that a Trustee in a bankruptcy case can liquidate real estate secured by a reverse mortgage if there is available equity above and beyond what a debtor can protect as exempt.  What is exempt will depend on the agreement entered into with the reverse mortgage lender.

David E Siegel, a reverse mortgage and commercial securitization attorney observes that legally, the trustee may have to pay the holder of the reverse mortgage a pre-payment penalty if one is provided for in the mortgage documents. 

In the case of real estate with significant equity, the pre-payment penalty will not deter a trustee from liquidating the property.  It therefore follows that once a reverse mortgagor is declared bankrupt; the normal tools available to a Trustee in bankruptcy will set in. 

Reverse Mortgagee in a bankruptcy

The position of a mortgagee in situations where the mortgagor in a reverse mortgage is declared bankrupt is that of a secured creditor.  They will enjoy a level of precedence when the security is finally realized.  Unsecured creditors on the other hand will have to wait for the secured ones to be serviced. 

It may be important to note that as lenders, a diligent and competent drafting of the necessary security documents is conducted.
The desire to protect Senior citizens through reverse mortgages, as noted above, has a limit.  It is prudent as a senior of 62years and above to therefore arrange your affairs in a manner that will not lead to being declared bankrupt. 

Neither reverse mortgages nor the US Housing and Urban Development will be in a position to rescue a bankrupt.

 

References

1. http://en.wikipedia.org/wiki/Bankruptcy
2. http://www.bankruptcy-lawyers-chicago.com/reverse_mortgages_and_bankruptcy.php
3. http://en.allexperts.com/q/Bankruptcy-Law-909/Reverse-Mortgage-Filing-Chapter.htm