Have a Reverse Mortgage Claim in Probate Court? Protect Yourself
Over fifty years ago, in a probate case coming from Tarrant County, Texas, a probate administratrix told a claimant that the debt would be paid in the estate. The claimant believed the administratrix and did not follow up on a claim that was filed in the case. The claimaint assumed that upon filing of the claim then it would be paid. Later when the claimant wanted to be paid or to enforce its lien, it learned that its debt would not be paid because the claimant did not follow up by filing a suit on a rejected claim after the administratrix took no action. This is a well known tactic of guardians or administrators – take no action and passively reject the claim. The claimant might fail to file suit on the claim to have the claim approved. This is a neat way for the probate administrators to eliminate claims and then say it was not their fault. This system was rejected in bankruptcy proceedings that do not require secured creditors to file claims. Lenders can lose liens in state probate proceedings if they fail to take proper action.
In the case of Russell v. Dobbs in 1962 from the Texas Supreme Court, the court held that the failure to file the claim resulted in the loss of the claim and the lien. The court wrote “Petitioners knew that their claim had been filed with the clerk, and were charged with knowledge that the same would be deemed rejected by operation of law if no action was taken by the Administratix within thirty days.” The claimant could not allege fraud, estoppel or waiver as a defense.
There are exceptions to this rule. For example, if a claimant does not seek money or property then there is no requirement to file a claim. If you own a vendor’s lien that arises from a purchase money mortgage lien then under Walton v The First National Bank of Trenton it is not subject to the probate claims process.
Reverse mortgage or home equity lienholders cannot simply post their collateral for foreclosure once a guardianship, probate or receivership proceeding is filed and foreclose on the court appointed representative. For a reverse mortgage or home equity loan to recover against its collateral, it would (1) file an authenticated claim, (2) allow the administrator or guardian to allow or reject the claim (it is deemed rejected if not acted on in 30 days), (3) if the claim is rejected then file suit within 90 days; (4) file the allowed claim or rejected claim that has been established by suit within 90 days with the clerk; (5) the allowed claim be approved by the probate court; (6) the allowed and approved claim be prioritized and then paid. However, because the reverse mortgage and the home equity lien is not being paid from the estate but from the sale of the property the lienholder can foreclose the property.
If the administrator or guardian finds a purchaser and desires to sell the property subject to the reverse mortgage or home equity lien then there must be an (1) application to sell, (2) order to sell, (3) report of the sale, and (4) order confirming the sale. If the lienholder fails to act within four years on the mortgage in the probate court then the lien can be lost resulting in the loan not being repaid.