Janet (not her real name), 90 years young, and her son, from Medford OR, were trying to find a solution to Janet’s credit card debts. Janet had accumulated over $43,000 in credit card debt between 11 different cards.
They embarked on a frustrating journey. Their first stop on their journey was to Janet’s bank in an effort to get a line of credit or refinance to get the credit cards paid off. My assumption was there was a miscommunication or misunderstanding, but Janet and her son both swear the bank told her to not worry about making any more payments and that the bank would have them paid off quickly. About a month later, Janet started receiving late payment notices from her creditors that also included notices about her new higher interest rates and higher payments. She called the bank and found out she was not approved for the loan. Yikes!
The missed payments are what really set everything off and had the house of cards crumbling. Prior to her not making the payments, her credit history was perfect. Not a single missed payment in the last 10 years. However, with the interest rate hikes and new higher minimum payments, she could no longer keep up with it all. Her minimum monthly payments on these cards now exceeded her income from social security, her entire source of income, by $595 a month.
They consulted with their family attorney and he suggested that they remove Janet’s name from the title of the home. There are two problems with this. First, she still had the debt and was getting hounded by her creditors. Second, from what I understand, if Janet passed away during a certain period of time, the creditors could still go after the estate for debts owed.
About a month after they removed Janet’s name from title to the home they met with a bankruptcy attorney. The attorney quickly realized that they could not file for bankruptcy because of Janet being removed from title. It was at this point that they were referred to me by the attorney to see if I could help.
This loan was very tricky because there are some odd things about a reverse mortgage. The first is that debts, other than liens against the property, cannot be paid off through close of escrow in order to qualify for the loan. The second thing is that there are minimum disposable income requirements based on household size. In Janet’s case, being single, she needed $589 in disposable income. But at this point, just the minimum payments on her credit cards exceed her monthly income by $595. How did I get this to work?
Through the reverse mortgage Janet was able to pull out $70,000 at close of escrow to pay off debts as well as pay off a contractor that had recently removed an out building. She also put some money in the bank. She was left with almost a $100,000 line of credit. We were able to dissipate the line of credit over her life expectancy of 5 years. In other words, we were able to add $20,000 of income per year on paper to have her qualify for the loan.
The reality is that she does not need $20,000 a year of extra income since she will be paying off the credit cards. However, those funds will be available to her whenever she needs them. Last time I talked with Janet’s son, he was helping her negotiate payoffs on the 11 credit cards.
This was a really tough loan. There were several other issues that I did not cover in the letter because I promised myself I would never go more than two pages on these scenarios. However, it is scenarios like this where you really need someone who specializes in these.
Are you or do you know a senior homeowner living in a house of credit cards? Refer them over to me to see if a reverse mortgage can help them get out from underneath that mess.