Bankruptcy and Reverse Mortgages

Reverse mortgages can at times be extremely beneficial to senior citizens to be able to obtain use of the equity in their homestead. The homeowner can eliminate the requirement to pay on a mortgage and may be able to receive an income stream from the lender.(This is not actually income but is a steady receipt of loan proceeds)(Also note that for practitioners in other states care must be given to the amount of homestead protection, which is unlimited in Florida.)

But timing is everything. A potential client saw me for a consultation last week. The client already obtained a reverse mortgage and took a lump sum of cash from the reverse mortgage. Meanwhile, the client had existing credit card debt which would easily justify a bankruptcy. Clearly, the bankruptcy should have come first, all debts would be discharged, and then the owner could safely get cash out.(Also, the client transferred the funds for the family to purchase property for her out of state to be the new residence.)

(Note that in the above case there is an argument that the funds taken out from the reverse mortgage, if still traceable, are the proceeds of the homestead and therefore exempt. But this was not a sale, and loan proceeds would likely be challenged as exempt by the trustee.)

In this case, as a Fort Lauderdale bankruptcy attorney in Broward County, Florida, it was certainly apparent that there would be great problems if a bankruptcy were to be filed.



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