In personal finance, few topics are as polarizing as reverse mortgages. Some see them as a lifeline for cash-strapped seniors, while others warn of hidden dangers lurking beneath the surface. This is exactly how it was posed to my client, a retired woman in her 70s saddled with nearly $100,000 in credit card debt who wanted to file for bankruptcy.
Her problem was that the majority of her debt was from a reverse mortgage she’d taken to pay other debts, so her dischargeable unsecured debt had turned into an obligation she needed to pay to keep her home.
Understanding Reverse Mortgages
A reverse mortgage is a special type of loan designed for homeowners aged 62 and older. It allows you to convert a portion of your home’s equity into cash, which can be received as a lump sum, monthly payments, or a line of credit. The loan doesn’t need to be repaid until the borrower dies, sells the home, or moves out permanently.
Reverse mortgages differ from their traditional counterparts in a significant respect: in a traditional mortgage, you borrow money and make monthly payments to pay off the loan. With a reverse mortgage, the lender pays you instead of making monthly payments, using your home equity as collateral. The loan balance increases over time while your home equity decreases.
The loan has to be repaid when you sell the home, die, or move to a nursing home or other long-term care facility if you’re away from home for 12 consecutive months or more.
Bankruptcy: A Less Risky Alternative?
If you’re struggling with debt and considering a reverse mortgage, it’s worth exploring bankruptcy as an alternative solution. While bankruptcy may seem intimidating, it offers several benefits over reverse mortgages for debt relief.
In most cases, filing for bankruptcy can help protect your home from foreclosure. Depending on your state’s homestead exemption laws, you may be able to keep all or a significant portion of your home equity, even after filing for bankruptcy. This means retaining your most valuable asset while getting the benefits of necessary debt relief.
Bankruptcy allows you to discharge most unsecured debts, such as credit card debt, medical bills, and personal loans. Once these debts are discharged, you’re no longer legally obligated to pay them, providing you with a fresh financial start. Conversely, reverse mortgages merely convert your home equity into a loan, and increase your debt burden.
The Danger Of The Debt Spiral
My client came to me with a reverse mortgage and nothing else. She’d gotten over $250,000 in a lump-sum payment on the reverse mortgage a few years ago, using the money to pay medical debts and living expenses.
Now the money was gone, she’d drained her equity and her ability to leave an inheritance, and she was up to her eyeballs in new debt. Bankruptcy could solve part of her financial woes, but not everything.
That’s not to say that a reverse mortgage is always a bad idea. They do, however, come with significant dangers that can jeopardize your financial future. Instead, consider filing for bankruptcy as a safer and more effective way to resolve your debt problems without putting your home at risk.