Understanding Reverse Mortgages and Its Impact on Bankruptcy

If you are 62 or older, a reverse mortgage could be a financial lifeline by tapping into your home’s equity. Let’s review how a reverse mortgage works and distinguish it from traditional mortgages, such as a second mortgage or a home equity line of credit (HELOC). Its effect on Chapter 7 and Chapter 13 bankruptcy will also be analyzed.

Understanding Reverse Mortgages

“It’s not my first rodeo.” Sorry, I had to tap my inner Tom Selleck. By the way, wasn’t he driving a red Ferrari not too long ago solving crimes? Time sure does fly by. But that’s why you’re here because time has flown by, and as you near retirement age or are retired, you are considering a reverse mortgage.

A reverse mortgage allows homeowners aged 62 or older to tap into their home’s equity for cash. That may sound like a home equity loan or HELOC (home equity line of credit), or a second mortgage, but it’s different.

With a HELOC or home equity loan, the mortgage lender provides cash based on your home’s equity. Monthly payments are made towards the mortgage, just like a first mortgage. But with a reverse mortgage, there are no monthly payments.

Reverse Mortgages versus Traditional Mortgages

You read that last sentence correctly. There are no monthly payments with a reverse mortgage, but it’s not free money either, and there are strict requirements to comply with.

For one, you must reside in and own the home. You must also keep taxes and insurance current on the property. If a homeowner’s association (HOA) exists, payments must also be current. However, when the home is sold or refinanced, those skipped mortgage payments are now due, plus interest that has been accruing. Depending on how long you have had the reverse mortgage, that could result in a substantial amount due and significantly reduce your home’s equity.

Another downfall is that it might affect the inheritance of your beneficiaries.

Qualifying for Reverse Mortgages

Before you consider a reverse mortgage, always consider the financial impact. Consult with a financial advisor if possible. Also, shop around with lenders. Compare HELOC interest rates to second mortgage interest rates to decide which option is best for you financially in the short and long term. A reverse mortgage isn’t always the best or only option.

What Happens in Bankruptcy with a Reverse Mortgage?

A reverse mortgage is treated like any other mortgage or equity line of credit if bankruptcy is filed. If you are keeping the home, and there are no exemption issues, then everything remains the same if a Chapter 7 bankruptcy is filed.

There could be several reasons why Chapter 13 bankruptcy is filed. One common reason is that the income is too high, and the Chapter 7 means test wasn’t passed. The means test is based on the average income in the last six months compared to the state average. If your income is above that average, Chapter 13 might have to be filed.

Another reason a Chapter 13 bankruptcy might be filed is to keep nonexempt assets. Chapter 13 can also be filed to catch up on secured debt payments like a car loan or mortgage. However, since no payments are due on the reverse mortgage, Chapter 13 wouldn’t apply to that scenario. With Chapter 7 bankruptcy, catching up on missed payments isn’t possible.

What to Watch Out For with Chapter 7 and Chapter 13 Bankruptcy

Whether it’s a second mortgage, an equity line of credit, or a reverse mortgage, there’s always the issue of how the funds were used and if they are still available. For example, with a reverse mortgage, the lender provides X amount in cash, and if that cash is still available and deposited into a bank account, those funds would not be protected or exempt. So unless all of the funds from the reverse mortgage have been spent, you could lose those funds to the bankruptcy trustee.

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But, how those funds were spent and how fast are also an issue. Even more so if the debt has been paid off initially and you’re in debt again.

In these scenarios, I wish to stress the point that there is no black and white answer to this. It is based on the experience of a bankruptcy lawyer as to when bankruptcy can be filed depending on the specific facts of your case.

Another issue to consider is your long-term plans. Since no payments are due on the reverse mortgage until the sale or refinance of the mortgage, the accumulating interest eats into your home’s equity. So, selling your home sooner rather than later might be a better option, depending on your situation.

My Personal Experience

My parents got a reverse mortgage approximately fifteen years ago. Not to be morbid, but outliving your income and assets is always a concern, a situation that applied to my parents. While my mother passed away in September of 2023, way before that, my parents were tapped out financially. It probably dates back to 2012, when my father passed away.

To be able to help my mother, who was taking care of my father, who had dementia and Parkinson’s, I moved in. I took over the bills, and that resolved any financial issues. However, not every elder is in that position, whether because their children are married, live far away, or can’t afford to help financially.

My parents’ home was underwater for years until COVID-19, which reduced the interest rates to zero percent. This created a buying frenzy that substantially increased home values.

My parents also lived in Miami, where real estate values are insanely high, so there was equity at the end of the day. But it was a stroke of good luck that increased their home’s equity, if it can be phrased that way, considering all the negatives attached to the coronavirus pandemic.

Now, you can understand my obsession with traveling down the path of financial freedom. I’m hoping to be debt-free within eight years, but it may happen within the next three to five years.

A whole new world will open up for me financially once the mortgage is paid off, the car loans, credit cards, and those damn student loans! But I’ve never been shy about saying that if I can do it, so can you!

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Udated on April 7, 2025.