Is a reverse mortgage for me?

22 Mar Is a reverse mortgage for me?

In normal times, I rarely see a client who can benefit from a reverse mortgage.

These are not normal times.

Twice this week, I have meet senior citizens who have little or no mortgages on their homes. That’s usually a very good thing. But these senior citizens have very minimal income – only social security. And they have very substantial debts – in each case close to $100,000.

Thanks to the credit card industry, these seniors had the ability to spend beyond their very limited means. Now they are being harassed day and night by credit card companies to pay up. They can’t pay on their limited social security checks – and those are exempt anyway – at least in Illinois.

They can’t get a mortgage on their house or sell their house either. The market is simply out of order.

What can they do?

There are only two possibilities. First, they could file a chapter 7 bankruptcy case. They will lose their home. The trustee will sell it. But they will get their homestead exemption. Depending on the state, that can be very generous. In Illinois, it is only $15,000 per person or $30,000 per couple. In Wisconsin, we have a choice of state or federal exemptions. Here, we’d opt for the more generous state exemption of $40,000 per person or $80,000 per couple.

What if the couple has more equity than exemptions? That’s a rare case these days. But it does happen. In this rare case, a reverse mortgage might be the option. The couple can encumber the house with the reverse mortgage and use the credit made available to settle the credit card debts.

We have found that in these situations, creditors will often take a lump sum payment of a fraction of the amount due. They will also send a notice to the IRS saying that they forgave debt leading to possible income tax liability. This is avoided in the case of bankruptcy.

Reverse mortgages are not for everyone. But in the rare case where reverse mortgages could be right for you, Lakelaw can help.

Lakelaw represents people in Illinois and Wisconsin.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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