Bankruptcy and the Reverse Mortgage

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As the baby boomers in Georgia and throughout the U.S. enter their 60s and approach their 70s, the idea of a reverse mortgage may seem especially appealing. Whether you apply for a federally insured Home Equity Conversion Mortgage (HECM) through the Federal Housing Administration (FHA) or a proprietary reverse mortgage through a private lender, this program allows homeowners who are 62 or older to convert part of the equity in their home into cash while still living in their home.

Reverse mortgages do have their advantages. They allow seniors to supplement their Social Security or other retirement income and can give you the money you need to make home improvements or for other needs. And you get to keep your house.

Like many things in life, they also have some downsides:

  • There are fees and insurance premiums, along with closing costs

  • What you owe grows as the loan matures and the interest on the loan accrues accordingly

  • Interest on your loan is not deductible until the loan is paid off

  • Because the loan drains the equity in your home, you may have little left to bequeath to your children, grandchildren or other heirs

There is one other caveat: If you decide to file for bankruptcy, you cannot receive funds from your reverse mortgage until your bankruptcy is complete unless the court or trustee approves the request for funds. If you depend on the income you receive from your reverse mortgage, this could come as a financial blow. It is important that you notify your attorney of the fact that you have a reverse mortgage during your debt relief consultation.