If you're in Chapter 13 bankruptcy and also thinking about getting some money out of your home, you might ask — can I still do a reverse mortgage? The answer’s not so straight forward, but yes, it can be possible. Let's break down all the things that you should know if you in this situation.
What’s a Reverse Mortgage?
A reverse mortgage is a kind of loan which allows senior home owners (typically age of 62 years or older person) to take money from their home equity without selling it or making monthly mortgage payments. The Most common one in U.S. is called as Home Equity Conversion Mortgage (HECM) and it is insured by FHA (Federal Housing Administration).
Instead of paying to the lender in regular mortgage, here the lender pays you. You can take the money monthly all at a once or even keep it like credit basis.
Sounds good, right? But, when bankruptcy comes in picture, things get little messy.
What’s Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is when you make a repayment plan with the court to pay back your debts within 3 to 5 years. It helps keep your home, unlike Chapter 7 which usually wipes debts by selling stuff. Chapter 13 bankruptcy is also known as a "wage earner's plan". It is mainly used by people who have regular income to manage their debts and keep their property.
Can You Do Reverse Mortgage While in Chapter 13?
Yes, you can do a reverse mortgage while in Chapter 13 bankruptcy; however, it is a complex process.
Doing a reverse mortgage while in Chapter 13 bankruptcy requires few approvals and few extra steps. Let’s look for the requirements of this process and various kind of challenges you might face.
1. You Need Bankruptcy Court Approval
First thing, you must get permission from the court and your bankruptcy trustee. You will have to file a motion explaining why reverse mortgage is needed, how it will help, and how you are going to use the money.
If the court think it is in your best interest, they may say yes.
2. You Must Be Paying Your Repayment Plan
You need to show that you are current on your Chapter 13 payments. If you missed even a few, that could be a problem to continue the process.
Lenders and the court want to see that you are serious and responsible.
3. Home Must Be Your Main Residence
To Qualify For Reverse Mortgage, The House Should Be:
Your main living place in your name (you own the house). In decent condition and have at least around 50% equity
If your house do not meet these above mentioned criterias, lender can refuse.
4. Some or All Funds Might Go Toward Debts
The court might tell you to use reverse mortgage money to pay off the Chapter 13 debts. In many cases, that could finish the bankruptcy early. So that is actually helpful sometimes.
5. Not Every Lender Will Say Yes
Not all lenders want to deal with someone in bankruptcy. You will need to find a reverse mortgage related lender who knows how to work with Chapter 13 cases.
This can take little time but, some are out there.
Pros & Cons of Doing Reverse Mortgage While in Bankruptcy
Let’s look at the ups and downs during this process.
Pros:
May help you to complete your Chapter 13 quicker
Gives you cash when you need the same
You can stay in your home
No monthly payments required
Cons:
Complexed process with legal steps
Takes court approval and trustee okay
Not many lenders want to work with bankruptcy
Things can be delayed if not handled right
Can You Get a Reverse Mortgage After Chapter 13 Ends?
Yes, and it is way more easier. Once your Chapter 13 is discharged or completed, you will not need to wait for court permission
More lenders will say yes
Process moves faster
Credit does not matter as much in reverse mortgages
So if you are almost at the end of your plan, maybe you can wait for few months.
What If You Already Have a Reverse Mortgage and File for Bankruptcy?
If you already got a reverse mortgage and now you are filing Chapter 13 do not worry too much. You do not lose the loan just because of bankruptcy.
But here’s what can happen:
Lender might pause your payments till court reviews everything
You will need to list the reverse mortgage in your bankruptcy paperwork
You must keep paying property taxes, insurance, and maintain the house
If you are stuck with those, lender can still foreclose.
Can Reverse Mortgages Be Foreclosed?
Yes. Reverse mortgage does not mean free money forever.
You must still:
Live in the home
Keep your house in decent shape
Pay your taxes and home owners insurance
If you do not pay, the lender can call the loan due and start foreclosure.
Final Thoughts
Doing a reverse mortgage while in Chapter 13 is not impossible, but it is simple either.
You will need:
Court and trustee approval
Good payment record on your bankruptcy plan
Enough home equity
A lender who is okay with your situation
If you do it right, it can help you pay off debts and improve your situation. You need to be patient, cautious and have sound knowledge about the process and follow the same step by step but, if you rush it, then it can be turned into headache.
Always talk to a bankruptcy lawyer and reverse mortgage expert before making any decisions. Each case differs subject to subject basis.
FAQs – Reverse Mortgage & Chapter 13 Bankruptcy
Q1. Can I get a reverse mortgage while still in Chapter 13?
Yes, but only if court and trustee approve it, and if lender agrees.
Q2. Do I need to finish my bankruptcy before applying?
Not always. You can apply during the process but, it is easier after discharge.
Q3. Will my credit score matter?
Not that much. Reverse mortgage mostly cares about age, equity, and property value not your FICO score.
Q4. Can I use reverse mortgage money to pay off my Chapter 13?
Yes, many courts actually prefer that. It can help close the bankruptcy faster.
Q5. What if I stop paying taxes after getting the loan?
You could lose your home. Lenders can foreclose if you do not meet obligations.
Q6. What kind of home can qualify?
Single-family homes,and some multi-unit homes (if you live in one unit). Mobile homes usually do not qualify for this process.
Final Word
If you are in Chapter 13 and thinking of using a reverse mortgage then please do not just go alone. It is a legal and financial maze. But if it is followed in right way, it could really give you relief and get you back on track.
Do research. Talk about the pros. Be honest in paperwork. And do not rush.
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