Court Rules Reverse Mortgage of Deceased Mother Can Be Paid Off in Bankruptcy

NewImage.jpgA South Carolina Bankruptcy court decision by the Honorable John E. Waites, Chief Bankruptcy Judge, found the entire balance of a reverse mortgage could be paid off over the five year life of a chapter 13 plan according to Law Bankruptcy Network.

In the case of Brown, 2010 WL 1903771, the debtor and her daughter had lived in the home belonging to the debtor’s mother for forty years. In 2007, the debtor’s mother died, leaving the home to the debtor. The home was subject to a reverse mortgage upon which $29,524.44 was due and payable immediately upon the mother’s death.

Upon learning of the mother’s death, the reverse mortgage was called by Financial Freedom and foreclosure proceedings began.  Two years later, The debtor (Daughter) then filed chapter 13, proposing in her plan that the $29,524.44 would be paid over five years, with interest at 5.25 percent and payments of $561.00 per month instead of Financial Freedom foreclosing.

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Financial Freedom objected to the plan, asserting its treatment under the plan is impermissible because the debtor is unable to cure the default under 11 U.S.C. § 1322(b)(5), the plan has been proposed in bad faith and is not feasible.  Both parties estimate the home is worth around $70,000, so there is clearly enough equity in the home to pay for her mothers mortgage balance.

However, the bankruptcy court overruled Financial Freedom’s objections to the chapter 13 plan and denied the motion it be allowed to proceed with foreclosure.  According to court documents, the Judge found the plan was proposed in good faith and that a reverse mortgage which came due before the filing of a chapter 13 bankruptcy could be paid over the five year life of the plan.

Court documents state that section 1322(c)(2) of the bankruptcy code allows the payment over five years of any mortgage upon which the last payment came due prior to the date of the last chapter 13 plan payment. This section allowed the debtor to modify the terms of the reverse mortgage, extending it over five years.

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  • Trial court decisions (available to those who have need to know and pay a subscription fee) do not create precedent for other courts to follow. If the lender appeals the trial court’s decision and the appellate court’s decision is published (appellate decisions sometimes are not published because they apply only to the narrow set of facts of a particular case), that will create a precedent for other Federal bankruptcy courts to follow. nnAll bankruptcy cases are handled by Federal bankruptcy courts; however, state property laws are respected by the court.

  • rainmand,

    This decision is not based on the debtor being personally liable for the debt but rather the jurisdiction of the court over the asset securing the debt. Not only are the personal debts of the petitioner under the oversight of the bankruptcy court but so are her assets. 11 U.S.C. u00a7 1322(c)(2) appears to provide the basis for this decision and states in part: u201cu2026 a claim secured only by a security interest in real property that is the debtoru2019s principal residence u2026.u201d Notice there is no requirement that the debt be recourse. The claim in this case is not being made against the petitioner but rather her principal residence.

    Per the interpretation of the HECM Vet, this section and this section alone is sufficient to authorize the Judge to override the terms of the reverse mortgage note and reschedule repayment over 5 years. I have not read the full decision and do not know if the Judge also relied on some aspect of South Carolina law in reaching his conclusion; however, it seems the HECM Vet is correct which would give this decision national application.

    So in response to your comment, while this may not be a u201cpresident,u201d it certainly could set precedence. Again it will be interesting to see if Financial Freedom appeals the decision. If the HECM Vet is correct, why would Financial Freedom appeal it unless they believe that the provision should not apply or if some odd aspect of South Carolina might apply so as to limit the application of the federal provision (— although that seems highly unlikely)?

    The case appears to have limited application except in cases where the owner of the home declares bankruptcy. It seems doubtful if the same consideration would be given to the petitioner if the debt was so substantial that the petitioner could not pay it off nearly so quickly or in cases where the balance due exceeds the value of the home at the time of the decision; however, since I am not a practicing attorney, I am just guessing.

    It certainly would be much harder to have it apply where there is more than one heir and the heirs are not spouses. This is a very interesting decision. I hope to find the full decision soon and quickly read through it.

  • HECM Vet,rnrnI did not know you are an attorney (just being facetious). Are you certain the Judge did not rely on South Carolina law in part in reaching his conclusion? I have not read the opinion. Can you cite where on the web we can find the actual decision?

  • While most are looking at this as a negative issue what a great proof that heirs really inherit the home. Not only that but the judge has all but allowed “a measure of assumption” of the reverse mortgage through bankruptcy.

    As an originator this is a great and practical illustration of the fact that heirs actually inherit the home.

  • That’s an interesting president – I thought Debtors could only take personal debt into their chapter 13. Her Mother aquired the debt, so the daughter isn’t obligated, yet she’s able to include it in her repayment schedule.rnrnI would never have thought of it … but now heirs have an additional way to pay back a Reverse Mortgage.

  • Section 1322(c)(2) of the bankruptcy code is unambiguous. Read it here:nnhttp://www.doney.net/bkcode/11usc1322.htmnnThis judge wasn’t making new law or applying his personal beliefs. He applied existing law to the facts of this case. nnThe decision requires that the debtor repay the entire debt over five years, at a market rate of interest (in this case, 5.25 percent). It is difficult to see how the lender is being screwed, and the homeowner may have an opportunity to save the home from foreclosure. nnThis is a bankruptcy case; as such, it was decided by a Federal court.

  • The Honorable John E. WaitesnUnited States Bankruptcy Court, ColumbiannJudge John E. Waites is a graduate of Davidson College and the University of South Carolina School of Law. On June 27, 1994, he was appointed United States Bankruptcy Judge for the District of South Carolina. Prior to appointment, he was a partner at Nexsen, Pruet, Jacobs and Pollard, specializing in bankruptcy practice. Appointed by the United States Attorney General, Judge Waites served as United States Trustee for the 4th Judicial Circuit and District of Columbia from 1987-1992. Prior to that appointment, he was the Estate Administrator of the U.S. Bankruptcy Court in the District of South Carolina from 1984-1987.

  • The first question is, was this a HECM, a Home Keeper, or a Cash Account? If this was a HECM, it seems that it had not reached its cross over point and been assigned to HUD by the date of death of the borrower. While an interesting case, it was decided in South Carolina.

    What does it matter how much the home was worth? It seems the court decided the issue based on principles of equity. The big question is how much precedence will this decision have outside of SC?

    No doubt HUD will be looking at this case quite intently. Can and will Financial Freedom or HUD appeal this decision?

    What about charging MIP if a HECM? What happens to the FHA insurance at this juncture?

    Is Fannie Mae involved and will they have to pay off any investors or will Fannie Mae just be saddled with a questionable payoff plan?rn

    Lots of questions, few answers.

  • The first question is, was this a HECM, a Home Keeper, or a Cash Account? If this was a HECM, it seems that it had not reached its cross over point and been assigned to HUD by the date of death of the borrower. While an interesting case, it was decided in South Carolina.

    What does it matter how much the home was worth? It seems the court decided the issue based on principles of equity. The big question is how much precedence will this decision have outside of SC?

    No doubt HUD will be looking at this case quite intently. Can and will Financial Freedom or HUD appeal this decision?

    What about charging MIP if a HECM? What happens to the FHA insurance at this juncture?

    Is Fannie Mae involved and will they have to pay off any investors or will Fannie Mae just be saddled with a questionable payoff plan?

  • The Honorable John E. Waites
    United States Bankruptcy Court, Columbia

    Judge John E. Waites is a graduate of Davidson College and the University of South Carolina School of Law. On June 27, 1994, he was appointed United States Bankruptcy Judge for the District of South Carolina. Prior to appointment, he was a partner at Nexsen, Pruet, Jacobs and Pollard, specializing in bankruptcy practice. Appointed by the United States Attorney General, Judge Waites served as United States Trustee for the 4th Judicial Circuit and District of Columbia from 1987-1992. Prior to that appointment, he was the Estate Administrator of the U.S. Bankruptcy Court in the District of South Carolina from 1984-1987.

  • Section 1322(c)(2) of the bankruptcy code is unambiguous. Read it here:

    http://www.doney.net/bkcode/11usc1322.htm

    This judge wasn't making new law or applying his personal beliefs. He applied existing law to the facts of this case.

    The decision requires that the debtor repay the entire debt over five years, at a market rate of interest (in this case, 5.25 percent). It is difficult to see how the lender is being screwed, and the homeowner may have an opportunity to save the home from foreclosure.

    This is a bankruptcy case; as such, it was decided by a Federal court.

    • HECM Vet,

      I did not know you are an attorney (just being facetious). Are you certain the Judge did not rely on South Carolina law in part in reaching his conclusion? I have not read the opinion. Can you cite where on the web we can find the actual decision?

      • Trial court decisions (available to those who have need to know and pay a subscription fee) do not create precedent for other courts to follow. If the lender appeals the trial court's decision and the appellate court's decision is published (appellate decisions sometimes are not published because they apply only to the narrow set of facts of a particular case), that will create a precedent for other Federal bankruptcy courts to follow.

        All bankruptcy cases are handled by Federal bankruptcy courts; however, state property laws are respected by the court.

  • That's an interesting president – I thought Debtors could only take personal debt into their chapter 13. Her Mother aquired the debt, so the daughter isn't obligated, yet she's able to include it in her repayment schedule.

    I would never have thought of it … but now heirs have an additional way to pay back a Reverse Mortgage.

    • rainmand,

      This decision is not based on the debtor being personally liable for the debt but rather the jurisdiction of the court over the asset securing the debt. Not only are the personal debts of the petitioner under the oversight of the bankruptcy court but so are her assets. 11 U.S.C. § 1322(c)(2) appears to provide the basis for this decision and states in part: “… a claim secured only by a security interest in real property that is the debtor’s principal residence ….” Notice there is no requirement that the debt be recourse. The claim in this case is not being made against the petitioner but rather her principal residence.

      Per the interpretation of the HECM Vet, this section and this section alone is sufficient to authorize the Judge to override the terms of the reverse mortgage note and reschedule repayment over 5 years. I have not read the full decision and do not know if the Judge also relied on some aspect of South Carolina law in reaching his conclusion; however, it seems the HECM Vet is correct which would give this decision national application.

      So in response to your comment, while this may not be a “president,” it certainly could set precedence. Again it will be interesting to see if Financial Freedom appeals the decision. If the HECM Vet is correct, why would Financial Freedom appeal it unless they believe that the provision should not apply or if some odd aspect of South Carolina might apply so as to limit the application of the federal provision (— although that seems highly unlikely)?

      The case appears to have limited application except in cases where the owner of the home declares bankruptcy. It seems doubtful if the same consideration would be given to the petitioner if the debt was so substantial that the petitioner could not pay it off nearly so quickly or in cases where the balance due exceeded the value of the home at the time of the decision; however, since I am not a practicing attorney, I am just guessing.

      It certainly would be much harder to have it apply where there is more than heir and the heirs are not spouses. This is a very interesting decision. I hope to find the full decision soon and quickly read through it.

  • While most are looking at this as a negative issue what a great proof that heirs really inherit the home. Not only that but the judge has all but allowed a measure of assumption of the reverse mortgage through bankruptcy.

    As an originator this is a great and practical illustration of the fact that heirs actually inherit the home.

  • Trial court decisions (available to those who have need to know and pay a subscription fee) do not create precedent for other courts to follow. If the lender appeals the trial court’s decision and the appellate court’s decision is published (appellate decisions sometimes are not published because they apply only to the narrow set of facts of a particular case), that will create a precedent for other Federal bankruptcy courts to follow. nnAll bankruptcy cases are handled by Federal bankruptcy courts; however, state property laws are respected by the court.

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