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The Law

Reverse Mortgage Payments and Court-Ordered Judgments

Are installment payouts fair game for debt collection?

The New Jersey Superior Court disagreed, saying that the bank payments were a loan to Ewing. The Camerons appealed. The Appellate Division of the Superior Court said that, like earned income, "installment obligations" are fair game for debt recovery. The court also noted that the New Jersey Supreme Court had defined debt as money "which one person is bound to pay to another under any form of obligation." The court held that the payments from the bank were debt owed to Ewing.

The court also noted that federal law defines a reverse mortgage as "future payments to the homeowner based on accumulated equity." New Jersey state law calls payments under a reverse mortgage "income," and the court recognized that these payments are a way for older people to supplement their income while staying in their homes.

Despite Wells Fargo's argument, the court found that a reverse mortgage is "unique" and can be distinguished from a typical loan because Ewing is not liable for repayment. Assuming he does not breach any reverse mortgage provision or move, Ewing's obligation to repay Wells Fargo is satisfied when the bank takes ownership of the house after his death.

Finally, the court said that the law favors giving creditors like the Camerons assistance enforcing their claims, especially where a debtor has the means to pay but is trying to evade that obligation.

For these reasons, the court ruled in favor of the Camerons receiving all or a portion of the payments.

The Camerons have brought the case back to the trial court, arguing that the reverse mortgage should be invalidated due to fraud. If they succeed, Ewing's house could be sold to pay more of his debt.

What it means to you: Anne McHugh, an attorney for the Camerons, cautions homeowners to be "hyper-vigilant" if they get a reverse mortgage. Consult with a financial adviser, attorney or accountant. Be aware that a reverse mortgage may not shield your home equity from creditors, despite what a bank might tell you.

Robin Gerber is based in Maryland.

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