During this past week I met with a new client who had recently been subject to a money judgment from a credit card company. The client, retired, had a reverse mortgage on his Florida homestead which money he used to pay his basic living expense. As most know, a reverse mortgage involves a bank providing a guaranteed monthly payment for the owner’s life in exchange for the house title upon the owner’s death. The retired client was concerned that his creditor could garnish his monthly reverse mortgage payments. I don’t think a court would permit garnishment of reverse mortgage payments if the mortgaged property were currently the debtor’s homestead. Protecting money received and deposited in the debtor’s bank account is more difficult.
Lets start with the general rule that although your homestead is creditor exempt once you convert the homestead equity to cash by mortgage or sale the money is no longer protected by the constitutional homestead protection- the one exception is the continued exemption of sale proceeds intended to purchase a replacement homestead. Application of this general principal would lead to the conclusion that proceeds payable or paid from a reverse mortgage are not protected. I think a court would not permit the garnishment for two reasons. In my opinion there is a strong public policy protecting the money people rely upon for retirement, and in most cases, reverse mortgages are used to fund retirement of seniors who have managed to pay off their mortgage. A brief legal research session revealed no Florida cases on this issue.
This client will have more problems protecting the reverse mortgage proceeds after they are deposited in a bank account. Florida courts have protected pension or 401k funds after deposited in financial accounts. There are too many cases holding that homestead proceeds lose asset protection in a bank account unless clearly intended to buy another homestead. This client will have to deposit his reverse mortgage checks in a protected financial account.
About the Author
Jon Alper is an expert in asset protection planning for individuals and small businesses.
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