Bankruptcy Court Allows Reverse Mortgage Repayment In Chapter 13 Bankruptcy

September 18th, 2010 by Reed Allmand

Bankruptcy Court Allows Reverse Mortgage Repayment In Chapter 13 Bankruptcy

Reverse mortgages, which allow senior citizen homeowners the opportunity to borrow against the equity of their home and defer repayment of the loan until after they move, sell the home or are deceased, are often used to make retirement financially easier.  But one of the drawbacks of a reverse mortgage is that the entire balance of the loan is due upon the death of the borrower (or when the borrower moves or sells the house) and most families of the deceased borrower simply don’t have the cash to pay so the property falls into foreclosure.  Well, in a recent bankruptcy court decision, the relative of a reverse mortgage borrower was allowed to keep the house and repay the mortgage in Chapter 13 bankruptcy.

In this Chapter 13 bankruptcy case, the reverse mortgage borrower and her daughter lived in the house.  When the borrower died, she left the home to her daughter which had a reverse mortgage of over $29,000 on it.  When the mortgage company found out that the borrower had died, they demanded full payment.  Of course the daughter of the borrower was unable to pay so the mortgage company began foreclosure proceedings against the property.   In response, the debtor filed Chapter 13 bankruptcy requesting that she be allowed to repay the mortgage over the course of five years.

The mortgage company objected to the bankruptcy plan; but the bankruptcy court overruled the objections noting that the Chapter 13 bankruptcy plan was feasible and was proposed in good faith.  The bankruptcy court also argued that the debtor should be allowed to remain in the home and repay the mortgage over the course of five years because she had contributed to the payments on the mortgage while her mother was alive, had enough income and had worked at the same company for the past 11 years. 

This ruling is definitely good news for those who have reverse mortgages and want to pass on their homes to their children or grandchildren.  Depending on their circumstances, family members of the deceased reverse mortgage borrower may be able to use bankruptcy to save the loved one’s home from foreclosure.

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About Reed Allmand

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Allmand's vision is rooted in his own financially precarious childhood in Abilene "My father always had difficulty holding a job and supporting our family, so after my parents divorced when I was 12, my sister and I got jobs to help make ends meet," he recalls. "I remember what it felt like as a child to worry that our car would be repossessed or home foreclosed on."

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