Types

• The effect of bankruptcy on your reverse mortgage income will depend in part on what type of bankruptcy you file. In Chapter 7, the bankruptcy court can sell your property to pay off your creditors; the remaining debt is "discharged" or wiped out. In Chapter 13, you pay your disposable income to your creditors for three or five years before you receive a discharge. Some debts, such as child support and recent back taxes, cannot be discharged.
  
  

Risks

• Each state exempts certain assets from sale under Chapter 7. If the equity in your home--the value less the amount you owe on the reverse mortgage--is worth more than the exemption, the court could sell it. Some states, such as Florida, exempt homes no matter how much they're worth. If the court sells the home, the proceeds will pay off the reverse mortgage, then any money left over will go to your creditors.
  
  

Effects

• In Chapter 13 bankruptcy, the court may count the money that you receive from the reverse mortgage as "disposable income" that must be paid out to your creditors. Disposable income is what ever is left after you pay living expenses, secured debts such as car loans and mortgages, and priority debts, which include taxes, alimony and child support. If the reverse mortgage payment comes due after you file bankruptcy--because you've moved out of your house, for instance--you may be able to pay it back as part of the three- or five-year plan, instead of all at once.
  
  

Considerations

• Some reverse mortgages are set up to provide a line of credit rather than cash payments. In that case, it's possible that the line of credit will remain available to you during bankruptcy. This may depend on how much of the line remains untapped.