Chapter 13: Modifying Reverse Mortgages

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Section 1322(b)(2) of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., enables a debtor “to modify the rights of holders of secured claim, other than a claim secured only by a security interest in real property that is the debtor’s principal residence. . .” This restricts most owners of homestead property from doing anything other than curing monetary and non-monetary defaults through a chapter 13 plan. An exception to this “anti-modification” is found in §1322(c)(2) of the Bankruptcy Code.

Under §1322(c)(2), if there is a default and the last payment on the original payment schedule for a claim secured by the debtor’s principal residence is due before the end of the debtor’s proposed plan, the debtor may modify the secured creditor rights by not only modifying the payments terms but also by lien stripping the creditor’s claim into a secured claim and an unsecured claim based upon the value of the property, provided that occurs prior to the sale of that property at a foreclosure sale. Judge Robert Mark, in the case of In re Delois Gray, 501 B.R. 501 (Bankr.S.D.Fla. 2015) held that the owner of property subject to a reverse mortgage could modify the reverse mortgage and value the property and bifurcate the reverse mortgagee’s claim in a chapter 13 plan.

In Gray, the debtor inherited property from her mother who had executed a reverse mortgage prior to the mother’s death. The debtor had no personal liability on the note underlying the mortgage. Judge Mark found that because the mortgage came due before the debtor filed her chapter 13 bankruptcy case, i.e. when her mother died, the debtor could modify the rights of the reverse mortgage holder so long as the debtor provided for payment within up to 5 years under a plan. Judge Mark went further and relied upon the Eleventh Circuit Court of Appeals’ decision in In re Paschen, 296 F.3d 1203 (11th Cir. 2002) and concluded that the debtor could strip the claim into a secured an unsecured portion (and potentially modify the interest rate on the loan).

This opinion has significant implications for the elderly population and their relatives, heirs and estate planning professionals. As the elderly population lives longer and reverse mortgages become more prevalent, heirs and estate planning professionals may find themselves with single family residences that either provide shelter for relatives or have equity, growth potential, or income earning potential worth preserving. So long as the property has not been foreclosed upon and the final payment has either become due or will be within five years, chapter 13 remains a viable option to modify reverse mortgages and preserve inherited residential real estate.