Reverse mortgage while in bankruptcy?

Question

Is it possible for a homeowner with about 50% equity to get a reverse mortgage while in bankruptcy?

If so that would probably allow them to stay in the home and make some needed repairs.

Ken M. · Answer

Possibly. But not likely would it be practical.

A reverse mortgage replaces a traditional mortgage and has certain requirements, and would likely be required to pay off the debts in the bankruptcy, including the first mortgage, taking them out of bankruptcy altogether.It would require coordinating the debtor, a lender willing to work with someone in bankruptcy, the trustee, the debtor's attorney, the mortgage lender getting paid off, appraiser, underwriting etc.The new lender would likely require that the debtor be taken out of bankruptcy as a condition of closing. It would be unusual for a judge to allow someone to refinance and not pay off some debt. It would be equally unlikely for a lender to take on that risk. The court would have to approve it. The Trustee would have to approve it. The lender on the 1st mortgage if any, would have to approve it. The lender may have a list of repairs that are needed to be done before approval of the loan.Meanwhile, the clock is ticking. Bankruptcy has timetables. Delays are very common, but it still has a clock ticking and other creditors demand being paid. In some instances, other creditors can vote against the plan and make a rework of the whole project required. The debtors have to start making payments again during this period or they could be kicked out of bankruptcy for not meeting the obligations agree to.It would have to become part of the repayment plan if a chapt 13 or outside of the plan with a reaffirmation of the debt in a chapt 7. It would make a difference in the types of debt a debtor is getting relief on. It would be impacted if there was IRS debt.It would depend on things like if it's a chapter 13 (you get to keep your house if you start making payments again and the court approves your chapter 13 "plan".) or a chapter 7 (which says, heck with it, I'm starting over. It would matter if the reason a chapt 13 was filed was to stop a foreclosure.Most bankruptcy attorneys will not explore those options because they're limited in how much they can charge to do a bankruptcy and they can't really make any money on this type of "add-on". Also, most bankruptcy attorneys would not know how to actually put that together, since it is so rare.It would require several months to get to the stage of knowing if it will fly because court hearings are scheduled 30 to 45 days in advance depending on the judge's calendar and the judge would have to be educated on why it benefits the bankruptcy estate.

Yes, unicorns do fly. I've seen them do so, but this is an elephant and no, I've haven't seen elephants fly since Dumbo.

Ken M. · Answer

in the event they default on the chapt 13 plan, they will fall out of protection from the court and the lender will petition to sell the property anyway. They should  wind up with any money over the amount owed to the lender, but people don't know they have to ask for it and fill out forms.

As an investor, I have been buying properties in foreclosure and bankruptcy for decades and rarely do people move quickly enough to solve the problem without help.

Bruce Lynn · Answer

Thanks for the info.  House is the only thing in BK, they didn't have any other debt.  I don't think it was a good option for them, but they got scared of course.   Their equity could pay off the 1st, give them a bit of cash perhaps.

I expect you are right about the attorney, because he'll quit making money.