Fact checked by Ryan Eichler
Reviewed by Doretha Clemon

The right of eminent domain is used by a government entity when a home or other property is seized to make way for a public project like a new road, bridge, or school. The takings clause of the Fifth Amendment to the U.S. Constitution requires that the owner must be justly compensated for the loss. Courts have held that to mean that the property owner must be paid the fair market value of the property.

In a typical mortgage, the amount may be enough to pay for a new home, because the homeowner’s equity increases as they make mortgage payments. However, if the homeowner has taken out a reverse mortgage, then they may only receive sufficient compensation to pay back their loan.

Key Takeaways

• Eminent domain cases on reverse-mortgaged properties are rare, but they can happen and can cause complications for borrowers.
• Unlike in traditional forward mortgages, a homeowner’s equity decreases in reverse mortgages, potentially leaving little more than what is needed to repay the loan and not enough for a new home, even if the fair market value is received for the condemned property.
• Two critical factors are the amount of the home’s value that is borrowed against, and whether values are appreciating in a particular home market.

How Eminent Domain Works

Eminent domain is the power of a government, whether federal, state, or municipal, to take private property for public use, following the payment of just compensation. This practice occurs in many different countries under different names. It may not seem fair to the owners of the property, and eminent domain legal cases—especially when the owners feel that they have not been justly compensated—are fairly common.

Eminent Domain and the Reverse Mortgage

The compensation payment, when combined with the equity in the home, may be enough to pay for a new home or at least provide for a down payment on a new mortgage. However, if the homeowner has a reverse mortgage, then the homeowner may not have enough remaining equity in the home to pay off the loan and buy a new residence using the compensation payment. 

The chances may be more favorable if the homeowner has significant equity in the property. The home may have increased in value since the reverse mortgage was obtained, or the homeowner may have maintained significant equity in the home by borrowing only a limited amount.

The worst-case scenario occurs when the homeowner has taken a substantial amount of the property value in reverse mortgage payments and has not had enough time (or enough luck) to enjoy a substantial increase in the property’s value. In such cases, the government payment may fall well short of the cost of replacement.

Important

Homeowners may face added costs, such as for appraisals and relocation, which are not necessarily covered in all eminent domain cases. 

Home Value

The problem arises when the amount borrowed leaves the homeowner with little equity in the property and thus little actual cash from the settlement with the condemning authority.

In a case in 2012, an Oregon homeowner was offered just enough money to repay her reverse mortgage when the state’s Department of Transportation needed her home for a road project. The state agency eventually agreed to let the woman, then in her mid-80s, live in an agency-owned home rent-free for as long as she needed it.

In a time of rapid home appreciation, such situations are less likely. A home’s value is likely to exceed the amount borrowed years before, notes David Henson, managing partner of Henson Fuerst of Raleigh, N.C., a specialist in eminent domain and related property law.

However, downward swings do happen in housing markets. While the law varies among states, condemning authorities and the courts aren’t likely to consider the homeowner’s debt.

Property Value vs. Debt

“The relevant factor truly is what’s the value of the property before they take it and what are the damages that result,” Henson says. “The debt is immaterial as to how the damages are either negotiated or tried if it goes in front of a jury.”

Many homeowners in such a situation face added costs, such as appraisal fees and relocation expenses, which aren’t necessarily covered in eminent domain cases. 

As in traditional forward mortgages, the language of the relevant loan agreement is crucial. It should spell out what happens in case of a condemnation of the property. It should also state that the proceeds are to go to the homeowner, although the lender will have to approve the ultimate arrangement.

How Does Eminent Domain Work?

Eminent domain is the right of a local, state, or federal government to acquire property deemed needed for the public good. The Fifth Amendment to the U.S. Constitution requires that owners of such property be justly compensated. That generally is held to mean that the property owners will be paid fair market value.

How Does an Eminent Domain Proceeding Affect a Reverse Mortgage?

The impact is largely the same as on a traditional, or forward, mortgage: The government pays the property owner, who will then have to pay any outstanding balance on the home loan.

In the best-case scenario, an owner who has significant equity in the property can replace it, using the government’s payment.

In a reverse mortgage, the owner’s equity has been reduced by the amount borrowed plus interest and other repayment costs. In such cases, the equity and the government payout combined may not be enough to buy a replacement home.

How Can I Protect My Property From Eminent Domain?

Property owners don’t have many options to protect their property from eminent domain, as it typically isn’t possible to anticipate the future needs of the public or the government.

The Bottom Line

An eminent domain condemnation can severely complicate the financial and housing situations of homeowners using a reverse mortgage, particularly if a large proportion of the home’s equity has been withdrawn.

Reverse mortgages can come with hidden fees and obligations

Fact checked by Ryan Eichler
Reviewed by Lea D. Uradu

Reverse mortgages can be a good way for older adults to access the money tied up in their homes. A reverse mortgage is a loan for homeowners who are 62 or older and have considerable home equity. It allows these seniors to borrow money against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.

If you think that sounds like an attractive proposition, you’re not alone. Reverse mortgages are also becoming more popular, with 32,991 issued in 2023 (the most recent statistics available). You should be aware, however, that reverse mortgages come with risks, obligations, and costs—and that sometimes these are hidden or hard to calculate before you finalize your reverse mortgage. In this article, we’ll take you through five of these issues.

What You Need to Know

• Sometimes the risks, obligations, and costs of a reverse mortgage are hidden or hard to calculate before you finalize your reverse mortgage.
• Lenders that use high-pressure sales tactics can be a red flag.
• There are lots of extra fees, which are often rolled into the loan, so they are not immediately apparent.
• You should add your spouse as a co-borrower where appropriate.
• A reverse mortgage does not mean your expenses end: You must keep paying property tax and homeowners insurance or else you could face foreclosure.
• Other ways of accessing your home equity might be more cost-effective in the long term.

Important

There are three types of reverse mortgages. The most common is the home equity conversion mortgage (HECM). The HECM represents almost all of the reverse mortgages that lenders offer on home values below $1,209,750 (the loan limit for 2025), so that’s the type that this article will discuss. However, if your home is worth more, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.

Some Lenders Use High-Pressure Sales Tactics

The first thing you should know is that reverse mortgages have a reputation for attracting predatory practices and lenders. Some seniors have been targeted with high-pressure sales tactics on reverse mortgages. You should be especially skeptical if a salesperson suggests how to spend the money from your reverse mortgage, particularly if they suggest putting the money into another financial product.

However, this doesn’t mean that a reverse mortgage is always a bad idea. For many people, a reverse mortgage can be a good way of providing themselves with a regular, dependable income in retirement. Just make sure you understand all of the complexities of the mortgage you take out.

Reverse Mortgage Fees Are High

The costs you will pay to take out a reverse mortgage can be very high compared with other forms of borrowing against your home equity. Borrowers must pay an origination fee, an upfront mortgage insurance premium, ongoing mortgage insurance premiums (MIPs), loan servicing fees, and interest. The federal government limits how much lenders can charge for these items, but the origination fee, in particular, can be high—it’s capped at $6,000.

These fees might not be immediately obvious to borrowers contemplating a reverse mortgage, since they are often paid from the money you borrow. This means that you won’t necessarily receive the money and then have to pay it to the lender, which can hide the fact that you are paying it. In practice, this process means that fees and interest are taken out of your home equity.

Important

Make sure you understand the residency rules of reverse mortgages and your other obligations. If you move away from your home for more than 12 consecutive months, even for medical reasons, you may be forced to sell your home. Similarly, your lender may foreclose on you if you fall behind with your homeowner’s insurance premiums.

You Should Add Co-Borrowers

It’s also important to pay attention to the residency rules when you take out a reverse mortgage. A reverse mortgage must be taken out against your principal residence, which is the place where you spend the majority of the year. If you leave this residence for six or 12 consecutive months, even for medical reasons, your lender may end your reverse mortgage and demand that you sell your home to pay off your debt. Lenders also might have rules about renting out all or a portion of your home.

This can be a particular problem for married couples who live together but only one of whom has their name on the reverse mortgage documents. In this case, the spouse may be forced to sell their home to pay back this debt while they are still living in it. To avoid this outcome, you should make sure that you add your spouse as a co-borrower, or at least make sure you can prove they qualify as an eligible non-borrowing spouse.

You Have Obligations

When you are working out whether a reverse mortgage can support you in retirement, you should factor in the cost of property tax and homeowner’s insurance. Most reverse mortgage lenders require borrowers to stay up to date on both of these. That’s because your house is their collateral for the loan, and it may not sell at the fair market price if it is damaged, which means the lender won’t get their money back.

In other words, after taking out a reverse mortgage, you will have obligations to your lender. And if you don’t fulfill them, your lender may foreclose on your loan. This is a real issue with reverse mortgages. According to a 2019 Brookings Institution paper on reverse mortgages, 18% of reverse mortgages ended in foreclosure. Sometimes it’s because the property taxes hadn’t been paid. but typically it was because the homeowners no longer lived in the home.

There Are Other Options

Understandably, a lot of reverse mortgage lenders won’t tell you that there are other—and potentially cheaper—ways of accessing the equity you’ve built up in your home.  

These alternatives include:

• A cash-out refinance: If you’re looking to access a large amount of home equity at once, a cash-out refinance can help with that. Doing this will mean you must make monthly payments to a lender. However, in the long term, you may preserve more of your equity compared to a reverse mortgage.
• A home equity loan or a HELOC: A home equity line of credit (HELOC) provides homeowners access to home equity. Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments. On the other hand, they may come with fewer fees and can be a less expensive alternative to a reverse mortgage.

The best option for you will depend on your reasons for seeking a reverse mortgage. Contacting a HUD counselor can be useful if you are still unsure what to do.

What Are the Downsides of Getting a Reverse Mortgage?

Mainly the costs. Reverse mortgages have expenses that include lender fees (origination fees are capped at $6,000 and depend on the amount of your loan), FHA insurance charges, and closing costs. These costs can be added to your loan balance; however, that means you will have more debt and less equity.

Do Reverse Mortgages Take Advantage of Seniors?

Sometimes, but not always. There have been reports that reverse mortgage lenders have targeted older adults with aggressive sales tactics. However, for some borrowers a reverse mortgage can be a great way to unlock the value of their home and provide a reliable source of income in retirement.

How Much Money Do You Get From a Reverse Mortgage?

The proceeds that you’ll receive from a reverse mortgage will depend on the lender and your payment plan. For a HECM, the amount that you can borrow will be based on the youngest borrower’s age, the loan’s interest rate, and the lesser of your home’s appraised value or the FHA’s maximum claim amount, which is $1,209,750 as of 2025.

The Bottom Line

A reverse mortgage can be a good way for older adults to access the equity they have built up in their homes. However, reverse mortgages may have hidden costs and obligations. It’s important to understand these before you agree to anything.

Fact checked by Skylar Clarine
Reviewed by Doretha Clemon

A reverse mortgage is a loan that can be taken out against the value of a home. Applicants for reverse mortgages must be at least 62 years old and have considerable home equity. Reverse mortgages allow homeowners to borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. The loan balance becomes due and payable when the borrower dies, moves, or sells the home.

Key Takeaways

• Reverse mortgages require that applicants be at least 62 years old and own a significant amount of equity in their home. 
• Applicants typically need 50% equity to qualify for a reverse mortgage. 
• There are no credit score or income requirements for reverse mortgages.
• HUD requires all reverse mortgage borrowers to complete a counseling session.

Types of Reverse Mortgages

• A single-purpose reverse mortgage is offered by state, local, and nonprofit agencies and is the least expensive option. 
• Home equity conversion mortgages (HECMs) are federally insured by the U.S. Department of Housing and Urban Development (HUD) and may carry high initial costs. 
• Jumbo reverse mortgages are proprietary reverse mortgage loans that allow homeowners to borrow up to $4 million.  

Important

The most common type of reverse mortgage for U.S. homeowners is the HECM. In 2023, borrowers can access up to $1,089,300 with a Home Equity Conversion Mortgage.

Reverse Mortgage Requirements

Age

Reverse mortgages are designed to allow older homeowners without other sources of retirement savings to access the equity they’ve built up in their homes. Applicants and any co-borrowers, such as a spouse, must be at least 62 years old to qualify for a reverse mortgage.

Equity

Applicants must own a significant level of equity in their home, commonly 50%. The property must be a house, condominium, townhouse, or manufactured home built on or after June 15, 1976.

Under Federal Housing Authority (FHA) rules, cooperative housing owners cannot obtain reverse mortgages since they do not own the real estate in which they live but rather own shares of a corporation. New York, where co-ops are commonplace, once prohibited reverse mortgages in co-ops. As of 2022, the state allows them only in one- to four-family residences and condos as HECMs insured by the federal government or proprietary reverse mortgages.

Income and Credit

Reverse mortgages do not have income or credit score requirements and differ from a home equity loan or a home equity line of credit (HELOC). Both loans provide homeowners access to home equity, but home equity loan and HELOC applicants are reviewed for income and credit score and required to make monthly payments if approved.

Counseling

Reverse mortgage applicants for an HECM must complete a counseling session sponsored by the U.S. Department of Housing and Urban Development (HUD). This counseling session instructs borrowers on the pros and cons of taking out a reverse mortgage, how to access funds and the effects of the loan on Medicaid and Supplemental Security Income (SSI) eligibility.

Costs

Borrowers must pay an origination fee and an up-front mortgage insurance premium. These costs can be paid from the loan disbursement. The up-front costs of reverse mortgages are high, and borrowers must decide to pay out of pocket or from the equity of the property.

Consequences

Borrowers will continue to pay for property taxes and homeowners insurance with a reverse mortgage. If these payments are missed, or the borrower moves to a long-term care facility for medical reasons, the loan must be repaid, which is usually accomplished by selling the house.

Note

A reverse mortgage is one way of accessing the equity you’ve built up in your home during retirement. Other options include a cash-out refinance or a home equity loan.

What Disqualifies Applicants From Getting a Reverse Mortgage?

Borrowers must live in the home as their primary residence for the life of the reverse mortgage and be at least 62 years old. Vacation homes or rental properties are not eligible.

What Percentage of Equity Is Needed for a Reverse Mortgage?

To qualify for a reverse mortgage, borrowers must own their home outright or have significant equity, commonly 50%. The specific percentage varies by lender and the type of reverse mortgage.

What Is the Most Common Type of Reverse Mortgage?

The Home Equity Conversion Mortgage (HECM) represents almost all of the reverse mortgages that lenders offer.

The Bottom Line

Reverse mortgages allow homeowners to access the equity in their homes during their retirement years. Applicants must be at least 62 years old and own a significant amount of equity in their home. There are no credit score or income requirements for reverse mortgages.

Reviewed by Marguerita Cheng

Oil and gas operations are capital-intensive businesses, yet most oil and gas companies carry relatively small amounts of debt, at least as a percentage of total financing. This can be seen in their debt-to-equity (D/E) ratios.

When considering an oil company’s D/E ratio, there are a couple of things to keep in mind:

• An oil company’s degree of indebtedness tends to go up when oil is cheap and down when oil is expensive. The cash flowing in when oil prices rise makes it easy for a company to pay down debt acquired in less favorable times.
• The average or acceptable D/E ratios of oil companies vary depending on their roles in the industry. A company’s position along the supply chain is a factor in its D/E ratio.

Key Takeaways

• Oil and gas companies tend to take on more debt when prices are low, and pay it down when prices rise.
• An investor should compare a company’s D/E ratio to its peers in its sub-sector.
• Oil and gas companies are categorized as upstream, midstream, or downstream, but some big companies operate across categories.

The Debt-to-Equity Ratio

The D/E ratio reflects the degree to which a company is leveraged. In other words, it shows how much of the company’s financing comes from debt as opposed to equity.

Generally speaking, higher ratios are worse than lower ratios, though higher ratios are more tolerable in certain industries.

A company’s D/E ratio is calculated by dividing total liabilities by total owner’s equity. This information is available in the financial statements of public companies.

Note

8% of U.S. GDP is derived from the oil and gas industry. according to the American Petroleum Institute.

Trends in the Oil and Gas Industry

Many oil companies shrank their D/E ratios during the mid-2000s on the strength of ever-rising oil prices. Higher profit margins allowed these companies to pay off debt and rely less heavily on additional debt for future financing.

Starting around 2008-2009, oil prices dropped dramatically. There were three main reasons:

1. Fracking brought in new oil reserves in an economical way
2. Oil and gas shale production exploded, particularly in North America
3. A global recession placed downward pressure on commodity prices

Profit margins and cash flow fell for many oil and gas producers. Many turned to debt financing as a stop-gap; the idea was to keep production flowing through low-interest debt until prices rebounded.

As a result, this pushed up D/E ratios across the industry. Before the financial crisis of 2008, common D/E ratios among oil and gas companies fell in the 0.2 to 0.6 range. As of September 2022, the range clusters between 0.1 and 0.4 with crude oil prices trading at around $85 per barrel.

D/E By Industry Segment

In February 2025, with oil prices at about $71 per barrel, the D/E ratios in the industry ranged from about 0.46 to 0.97.

Average D/E ratios vary with the segment of the industry that the company inhabits. Current average D/E ratios in these segments are as follows:

• Oil and gas drilling: 0.46
• Oil and gas exploration and production: 0.50
• Oil and gas equipment and services: 0.52
• Oil and gas integrated: 0.61
• Oil and gas midstream: 0.97
• Oil and gas refining and marketing: 0.74

(An integrated oil and gas company has multiple divisions across industry sectors.)

Oil and gas companies might also use volumetric production payments (VPPs) to fund pre-exports and increase cash flows. VPPs allow the owner to maintain ownership while monetizing a field or proven orders.

What Are the Main Segments Within the Oil and Gas Industry?

The oil and gas industry is vast, and can be roughly broken down into three segments: upstream, midstream, and downstream.

• Upstream companies locate oil and gas sources and recover them.
• Midstream companies transport the raw product from wells to refineries.
• Downstream companies refine and distribute the product.

Integrated companies like ExxonMobil and BP are involved in all these segments.

What Are the Risks of Investing in Oil and Gas?

As every consumer knows, oil is subject to wild swings in price depending on geopolitics and the state of the economy. The price of a barrel of crude oil crashed from $201.46 in June 2008 to $62.14 the following January.

The industry sector thrives when prices are high but may struggle when prices drop.

Then there’s the potential, still unrealized, of a green revolution to alternative energy sources. Oil may be an industry in decline.

What Are the World’s Biggest Oil Companies?

None of the three biggest oil companies are based in the U.S. In terms of revenue, they are Saudi Aramco, China Petroleum & Chemical Corp., and PetroChina Corp. Ltd.

Number 4 on the list is ExxonMobil Corp.

The Bottom Line

A company’s degree of indebtedness is an important piece of information to its prospective investors. However, it must always be seen in relation to its industry, some of which need to rely on debt more than others. In the case of the oil and gas industry, look further to the average D/E ratio of company’s in its sub-sector.

Reviewed by Julius Mansa

What Are the Economics of the iPhone?

It’s estimated that 1.38 billion people around the world own an iPhone in 2025. About 155 million of them are in the U.S. That’s a market share of about 23% globally, and 59% in the U.S.

The iPhone lineup from Apple Inc. (AAPL) currently includes the iPhone 16, iPhone 16 Pro, iPhone 15, iPhone 14, and iPhone SE, at prices ranging from $599 to $999.

Apple’s greatest product may also be its greatest curse. The iPhone has been the company’s biggest money-maker, accounting for nearly two-thirds of its sales of products and services in its fiscal 2024 year. Much of the company’s efforts have been focused on creating ancillary services and products that complement the iPhone.

With all of the products and services intertwined, it’s challenging for investors to determine just how much money Apple earns from iPhone sales.

Key Takeaways

• iPhone sales made up about two-thirds of Apple’s total 2024 sales.
• Apple shipped 151.3 million iPhones in the first nine months of 2024, identical to the number delivered in the previous period.
• iPhone’s global market share is about 23%.

Understanding How the iPhone Makes Money

Investors and analysts cannot readily calculate how much profit Apple earns on each product as its reports include only revenue by product. The table below displays the company’s products and services revenues for the past three years. The data was pulled from the company’s 10K report filed in September 2024.

• Apple reported $301 billion in net sales of products and services for its fiscal year 2024. That’s down from $383 billion in 2023 and $394 billion in 2022. Note that Apple sales move in tandem with new product launches. The iPhone 16e and the iPad Air5 were released in 2022.
• The iPhone generated $201.1 billion in sales and services in 2024, meaning the iPhone represented about two-thirds of the company’s total sales for the year.
• That iPhone sales number is virtually flat from the previous year but down from about $205.5 billion in 2022.

Apple is one of the most valuable companies to date, yet most of its revenue depends on a single product line.

Services and Wearables

Apple has been actively expanding its services business in recent years, which includes its App Store, Apple Music, and Apple T.V. The company has also grown its wearables business such as the AirPods.

It’s important to consider that the company’s services and wearables business is an extension of its iPhone and other hardware products. Its businesses for services and wearables are an offshoot of its hardware business.

The company’s sales of wearables and accessories totaled $37.0 billion in 2024, down 7% from the previous years. Services revenue $96.1 billion, up 13% from 2023.

The ancillary businesses would not be possible without the company’s hardware products, including the iPhone. That makes it harder to pinpoint the overall profitability of the iPhone.

What Does it Cost to Build an iPhone?

Apple’s sourcing model is one of the reasons it generates attractive profit margins. The company makes very little of its products. Components and materials are purchased from sources around the globe and sometimes even from direct competitors such as Samsung.

This process significantly lowers capital expenses for Apple, saves the consumer a bit of money, and lets shareholders benefit from the difference.

The iPhone lineup in 2025 has retail prices ranging from $599 to $999.

It’s estimated that the components of an iPhone cost from $400 to $700 per unit depending on the model. That figure does not include the costs of marketing, distribution, or software development. It also does not take into account corporate and retail sales costs.  

How the iPhone Helps the Economy

Apple claims that the company has created more than two million jobs across all 50 states.

That includes 80,000 company employees, 450,000 jobs at suppliers, and 1.5 million jobs “attributable to the App Store ecosystem.” The growth has been exponential since introduction of the iPhone in 2007.

What New Products Is Apple Releasing in 2025?

There are facts and there are rumors. Let’s stick to the facts:

• The iPhone 16e is available for pre-order, priced from $599.
• An Apple smart home display, which looks like a 6-inch iPad to hang on your wall, is expected to be released in the second half of 2025.
• An iPhone 17 Pro is in the pipeline and may be released in the second half of 2025.

Is Apple the World’s Biggest Company?

Apple is the world’s biggest company by market capitalization. It has been since Aug. 2, 2018, when it became the first company to pass the $1 trillion in market value. As of Feb. 23, 2025, Apple’s market cap is $3.69 trillion.

Are There Risks to Investing in Apple Now?

As for any investment, there are potential risks and rewards to buying Apple stock.

Since early 2007 when the first iPhone was released, the stock has climbed from $3 or $4 a share to about $227 in late 2024.

Is the market for the iPhone limitless? Will Apple come up with a new product that rivals the iPhone in popularity? These are among the issues to consider.

The Bottom Line

Global demand for the iPhone lineup and its many related products have made Apple the world’s biggest company by market capitalization. Its dependance on the iPhone as a driver for sales worries some analysts. They don’t know how long Apple can sustain this level of demand for its leading product, or whether it can pull off another product introduction that has its seismic effect on the market.

One involves liquidating assets, while the other reorganizes them

Reviewed by Pamela Rodriguez

Chapter 7 vs. Chapter 11: An Overview

Companies that find themselves in a dire financial situation where bankruptcy is their best—or only—option have two main choices in the U.S.: Chapter 7 bankruptcy or Chapter 11 bankruptcy. Both are also available to individuals.

Under a Chapter 7 bankruptcy, the business closes its doors and its assets are sold off to pay its creditors. In a Chapter 11 bankruptcy, the company may continue to operate under court supervision.

Key Takeaways

• Chapter 7 and Chapter 11 are two common forms of bankruptcy.
• In a Chapter 7 bankruptcy, the assets of a business are liquidated to pay its creditors, with secured debts taking precedence over unsecured debts.
• In a Chapter 11 bankruptcy, the company continues to operate under the supervision of a court-appointed trustee, with the goal of emerging from bankruptcy as a viable business.

Chapter 7

Chapter 7 bankruptcy is sometimes called liquidation bankruptcy. Businesses going through this type of bankruptcy are past the stage of recovery and must sell off assets to pay their creditors. The process works much the same for individuals.

The bankruptcy court will appoint a trustee to ensure that creditors are paid off in the right order, following the rules of “absolute priority.”

Secured debt takes precedence over unsecured debt in bankruptcy, and the holders of secured debts are first in line to be paid off. Loans that are secured by a specific asset, such as a building or a piece of expensive machinery, are examples of secured debt.

Whatever assets and cash remain after all the secured creditors have been paid are pooled together and distributed to creditors with unsecured debt. Those would include bondholders and shareholders with preferred stock.

To qualify for Chapter 7 bankruptcy, the debtor can be a corporation, a small business, or an individual.

Individuals are also eligible for another form of bankruptcy, Chapter 13, in which the debtor agrees to repay at least a portion of their debts over a three- to five-year period under court supervision.

Chapter 11

Chapter 11 bankruptcy is also known as “reorganization” or “rehabilitation” bankruptcy. It is the most complex form of bankruptcy and generally the most expensive. For that reason, it’s most often used by businesses rather than individuals. The business may be corporations, partnerships, joint ventures, or limited liability companies (LLCs).

Unlike Chapter 7, Chapter 11 gives a company an opportunity to reorganize its debt and try to reemerge as a healthy business.

A Chapter 11 case starts with the filing of a petition in a bankruptcy court. The petition may be a voluntary one, filed by the debtor, or an involuntary one, filed by creditors who want their money.

During Chapter 11 bankruptcy, the business will keep operating while taking initiatives to stabilize its finances, such as cutting expenses, selling off assets, and attempting to renegotiate its debts with creditors—all under the court’s supervision.

The Small Business Reorganization Act of 2019, which went into effect on February 19, 2020, added a new subchapter V to Chapter 11 designed to make bankruptcy easier and faster for small businesses, which the U.S. Department of Justice defined as “entities with less than about $2.7 million in debts that also meet other criteria.” The act “imposes shorter deadlines for completing the bankruptcy process, allows for greater flexibility in negotiating restructuring plans with creditors, and provides for a private trustee who will work with the small business debtor and its creditors,” the Justice Department says.

Note

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, made temporary changes to bankruptcy laws designed to make the process more available to businesses and individuals economically disadvantaged by the COVID-19 pandemic. These changes ended, for the most part, in March 2021.

Chapter 7 vs. Chapter 11: Key Differences

Like Chapter 7, Chapter 11 requires the appointment of a trustee. However, rather than selling off all assets to pay back creditors, the trustee supervises the assets of the debtor and allows the business to continue.

It’s important to note that debt is not absolved in Chapter 11. The restructuring only changes the terms of the debt, and the company must continue to pay it back through future earnings.

If a company is successful in Chapter 11, then typically it will be expected to continue operating in an efficient manner with its newly structured debt. If it is not successful, it will file for Chapter 7 and liquidate.

Chapter 7

• Known as “liquidation” bankruptcy

• Assets are sold off by a trustee to pay debts

• When all assets are sold, the remaining debt generally is forgiven

• Used by both businesses and individuals

Chapter 11

• Known as “reorganization” bankruptcy

• Debts are restructured by a trustee, and the business continues

• Remaining debts must be paid back through future earnings

• Used primarily by businesses

How to Prevent Bankruptcy

Bankruptcy is generally a last resort for businesses and individuals alike. Chapter 7 will, in effect, put a business out of business, while Chapter 11 may make lenders wary of dealing with the company after it emerges from bankruptcy. A Chapter 7 bankruptcy will remain on an individual’s credit report for 10 years, and a Chapter 13 for seven.

Bankruptcy can be unavoidable. A business can go under during a severe recession. An individual can suffer a job loss or crushing medical expenses.

Still, many bankruptcies could have been avoided. One key, for both businesses and individuals, is to borrow judiciously. For a business, that could mean not expanding too rapidly. For an individual, it might mean not buying a larger home or a costlier car.

Before filing for bankruptcy, a business owner should consult with an outside attorney who specializes in bankruptcy law and discuss the alternatives.

Individuals are required by law to take an approved credit counseling course before they file. They may also have other resources available, such as a reputable debt relief company that can help them negotiate with their creditors. Investopedia publishes an annual list of the best debt relief companies.

Can You File for Bankruptcy Without an Attorney?

Individuals can file for bankruptcy under Chapter 7 or Chapter 13 without an attorney, according to the website of the U.S. federal courts system. This is called “filing pro se.”

However, the site strongly recommends seeking the help of a qualified attorney “because bankruptcy has long-term financial and legal outcomes” and misunderstandings or mistakes can have serious results.

Who Can File Chapter 11?

Chapter 11 bankruptcies can be filed by any individual, business, partnership, joint venture, or limited liability company, with no specific debt-level limits and no required income.

What’s the Difference Between Chapter 11 and Chapter 13?

Both Chapter 11 and Chapter 13 allow for the discharging of debts but have different costs, eligibility, and time to completion, making them two different types of bankruptcies.

• Chapter 11 can be done by almost any individual or business, with no specific debt-level limits and no required income.
• Chapter 13 is suitable for individuals with stable incomes, and this type of bankruptcy sets specific debt limits.

The Bottom Line

Chapter 7 and Chapter 11 are two common options for businesses to declare bankruptcy.

Chapter 7 is considered a liquidation bankruptcy: it doesn’t require a repayment plan but the business has to sell some assets to pay creditors.

Chapter 11 is considered a reorganization bankruptcy that allows businesses to maintain their operations while creating a plan to repay creditors.

Reviewed by Lea D. Uradu

Lien vs. Encumbrance: An Overview

A lien represents a legal right to take possession of someone else’s property until a debt is repaid or an obligation is met. It’s a means of securing payment—the settlement of an obligation from the property owner. By contrast, an encumbrance is a much broader term that refers to any type of claim against a property. A lien is one kind of encumbrance, but not all encumbrances are liens.

Key Takeaways

• A lien is a monetary claim against property intended to ensure payment.
• Any lien is an encumbrance, but the reverse is not always true.
• Encumbrance refers to any claim against a property, not just one to ensure payment.

Liens

A lien is a legal right granted by the owner of a property, by a law, or otherwise acquired by a creditor. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.

Liens always represent a financial interest. A lien often results from secured loans such as auto loans and mortgages. It effectively gives the creditor the right to seize and sell the property that the creditor has a lien against to satisfy the outstanding debt.

A common example: If a person fails to make the payments on a car loan, it can lead to the financing company repossessing and selling the car to obtain payment. Another type of common lien is a judgement lien resulting from a lawsuit initiated by a creditor. Upon winning the suit, a creditor can have a lien placed on the debtor’s property in order to facilitate repayment of the debt. Liens may even include the right to attach funds in the debtor’s bank account.

Liens attached by tax agencies are specifically referred to as tax liens. A federal tax lien is notable in that it takes precedence over any other claims by creditors, in most cases.

Important

Home buyers need to be aware of any encumbrances on a property before they make a purchase. A title search should bring to light any outstanding claims or liens.

Encumbrances

An encumbrance is a claim against a property by a party that is not the owner. It can affect the transferability of the property and restrict its free use. Most, but not all encumbrances relate to real estate. Here are a few common types.

Easement

A easement is a real estate concept that defines one party’s rights of use or improvement of someone else’s property. An affirmative easement allows the easement holder to use the property according to the easement’s terms. An example: a public utility company may have the right to erect telephone poles or run pipes either above or beneath private property. A negative easement lets the easement holder prevent certain actions. For example, a neighbor may have the right to stop their next door property owner from mowing their lawn at certain times or on certain days of the week.

Encroachment

An encroachment is an encumbrance that involves a party who is not the property owner intruding on or interfering with the property—for example, by building a wall that crosses the lot line. Until the issue is resolved, the property with the encroachment is encumbered, or can’t be freely used.

Lease

When someone rents a property for a specified time period and rate, it’s a type of encumbrance for the landlord, who retains title to the property but is constrained from using it by the lease agreement.

Special Considerations

Liens and encumbrances are most commonly associated with real estate, but either one may be applied to personal property as well. If an individual fails to pay a debt, a creditor or tax agency may attach a lien or an encumbrance to the individual’s property, such as a car or boat. Having such a claim against the property creates an unclear title and can limit the ability to sell or otherwise transfer the property.

Any existing encumbrance is required to be disclosed by the owner of the property to potential buyers. A buyer will inherit the encumbrance upon purchasing the property. A seller who does not disclose existing encumbrances is subject to legal action by the buyer for their failure to do so.

What Is a Restrictive Covenant?

This is a type of encumbrance that curtails how a property can be used. Deed restriction is another term for a restrictive covenant. Homeowners associations (HOAs) often have restrictive covenants that may, for example, forbid using a certain type of fencing around a yard or the running of a small business in the home.

What Does It Mean to Own a Home Free and Clear?

Owning a home free and clear means that the property has no legal encumbrances. That means the homeowner has paid off their mortgage and there are no outstanding liens against the home. It also means there are no encroachments or deed restrictions on the property. Another term for this is having clear title.

Can Zoning Laws Be Encumbrances?

Yes, zoning laws and environmental regulations can be encumbrances in that they may prohibit specific uses or improvements to the land. If a part of the property is in a designated wetland area, for example, state or local law may prohibit the development of that part of the property.

The Bottom Line

Encumbrances encompass more claims on property than liens do. Some are financial, some are not. But a lien is tied to a debt obligation, which allows the lien holder to seize collateral property if the debt is not paid in a timely fashion. A common type of lien is a mortgage, under which a mortgagee who has agreed to pay off the debt on a home can be forced to forfeit the property if they cease making payments.

Fact checked by Suzanne Kvilhaug
Reviewed by Lea D. Uradu

People who have reached their 50s may wonder if it’s too late in life for them to commit to a mortgage and purchase a home. Years ago, the answer would likely be yes.

However, growing numbers of Americans are working, or plan to work, well beyond the traditional retirement age of 65 in order to maintain a comfortable income. And, whether they’re working or retired, the increase in life expectancy means that most people in their 50s have many years of life ahead of them.

Below are some reasonable questions you might ask yourself before signing up for a new mortgage. Most are relevant to people of any age but they are particularly pertinent to people in their 50s.

Key Takeaways:

• Older homebuyers, now in their peak earning years, might consider a 15-year mortgage or even a shorter term in order to pay it off before they retire.
• Empty-nesters might consider where they really want to live long-term.
• Maybe it’s time to downsize, or at least right-size your home to fit your needs now.

1. How Big a Home Do You Need?

It’s not always wise to buy the biggest home you can afford, particularly if your children have grown up or soon will. Big houses are expensive to heat and cool, labor-intensive to maintain and clean, and their property tax bills are bigger as well.

On the flip side, a bigger home will allow you to accommodate grandkids for overnight visits.

2. Is a Short-Term Mortgage Better?

For those purchasing a home in their 20s and 30s, a 30-year mortgage is the obvious financing choice—in part, because people of that age don’t usually have the financial means to make the higher payments associated with shorter-term loans.

But people in their 50s might opt for a 15-year mortgage. They should be in their peak earning years. They’ll want to make sure they pay off the loan while they’re still working. For that matter, they won’t want to be forced to put off retiring because of the burden of a mortgage.

A mortgage calculator is a useful tool to budget these costs.

3. Pay Off the Mortgage or Save for Retirement?

Americans at any age are struggling to maintain a balance between a good standard of living now and sufficient savings for retirement down the road. When you’re in your 50s, buying a house might cut into your retirement savings significantly, if it pushes your living costs up much higher.

Maximizing your retirement contributions may ultimately net you more money than the cash you’d save by paying off a mortgage in the 15 or 20 years before you retire.

Once you hit 50, your annual contribution limit to an individual retirement account (IRA) increases by $1,000 over the $7,000 standard limit in 2025. For 401(k) plans, people aged 50 and over can contribute $7,500 more than the standard $23,500 limit as of 2025.

That’s a recognition by the IRS that you may need what it calls a “catchup contribution” to boost your retirement savings.

4. Where Will You Live?

Location significantly influences home prices. A house in St. Louis is going to cost much less than an identical home in San Francisco.

If you’re not inclined to move across the country, consider price differentials across different neighborhoods in your area. But keep in mind that homes in more remote areas may be cheaper, but they might not be the best choice for commuters. 

5. How Is Your Health?

If you or a family member has expensive medical issues, you may need to allocate your savings to medical expenses rather than to a new home.

This is another good reason to avoid overspending on housing.

6. How Often Do the Kids Visit?

If your extended family visits often, buying a larger home with plenty of bedrooms makes sense. But if your family only visits every few years, paying for hotel rooms is more economical than paying off the mortgage on a large home.

7. When Is the Right Time?

If you have children who are in college or will be soon, you might avoid buying a new home for now. Unless, that is, you plan to downsize, in which case some of the money from selling the old house can be used to cover tuition expenses.

Is It Difficult for an Older Homebuyer to Get a Mortgage?

Yes. Applications to finance or refinance a home are more likely to be rejected if the applicant is older.

A 2023 white paper by economist Natee Amornsiripanitch, of the Federal Reserve of Philadephia, says that the probability of rejection of a mortgage application climbs steadily with the age of the applicant and accelerates in old age. If they are approved, they tend to pay slightly higher interest rates. In fact, age appears to be as likely a barrier to a mortgage application as race and ethnicity.

Isn’t Discrimination Against Older Mortgage Applicants Illegal?

You bet. It’s illegal to reject any loan applicant on the basis of age. But there are a number of legally permissible factors that work against older applicants. These include:

• The length of time you are likely to continue having your present income.
• The sources of your income. (Investment income is considered a bit riskier than earned income.)

On the other hand, some of the criteria for approval favor older applicants. For example, people in their 50s usually can show a longer history of successfully handling credit.

Can a 70-Year-Old Get a 30-Year Mortgage?

Yes. There is no age limit to a mortgage application. If you have a substantial down payment and a steady income (which can include pension and Social Security payments), you have a good chance of approval regardless of your age. As noted above, there’s a high rejection rate for older applicants but you can get past it with better-than-usual qualifications that will get you past that age barrier, such as a higher down payment and substantial savings.

The Bottom Line

If you’re in your 50s, it’s not too late to buy a new home, but it’s key to ask the right questions and make the wisest decisions possible. Above all, avoid getting stuck making mortgage payments years into your retirement.

Reviewed by Lea D. Uradu
Fact checked by Hans Daniel Jasperson

Mortgage lenders usually verify your employment by contacting your employer directly and reviewing recent income documentation. The borrower must sign a form authorizing an employer to release employment and income information to a prospective lender. At that point, the lender typically calls the employer to obtain the necessary information.

Employers are usually happy to help, but there are steps borrowers can take if they refuse to verify employment.

Key Takeaways

• Mortgage lenders verify employment by contacting employers directly and requesting income information and related documentation.
• Most lenders only require verbal confirmation, but some will seek email or fax verification.
• Lenders can verify self-employment income by obtaining tax return transcripts from the IRS.
• There are several steps that borrowers can take if employers refuse to verify employment.

The Verification Process

In general, lenders verbally verify the information borrowers provide on the Uniform Residential Loan Application. However, they may opt to confirm the data via fax, email, or a combination of all three methods.

Mortgage lenders use this information to calculate several metrics to determine the likelihood that a borrower will repay a loan. A change in employment status can have a significant impact on the borrower’s application.

Additional Information

When verifying employment, a lender will frequently ask other questions as well. The lender may inquire about the likelihood of continued employment.

Lenders are also interested in verifying position, salary, and work history. While lenders usually only verify the borrower’s current employment situation, they may want to confirm previous employment details. This practice is common for borrowers who have been with their current company for less than two years.

Verification for Self-Employed Individuals

Many people who take out mortgages are self-employed. In this situation, lenders often require an Internal Revenue Service (IRS) Form 4506-T. This form is a request for “Transcript of Tax Return” and allows the lender to receive a copy of the borrower’s tax returns directly from the IRS. In a self-employed situation, the lender may also ask for attestation by a certified public accountant (CPA) to confirm income.

Responding to a Refusal to Verify Employment

It is frustrating when an employer will not verify employment, but it can be easy to fix this situation in some cases. The first thing to do is tell your employer’s human resources (HR) department that you need verification.

Some companies will not give out employment-related information without your permission. This policy is designed to stop sensitive information, such as your salary, from falling into the hands of criminals.

Important

Don’t give up or get angry if an employer will not verify your employment. There are usually ways to deal with this problem or work around it.

There can also be state laws or company rules against sharing particular employment-related information. Talk to your employer to determine if some general rule prevents them from sharing. If so, ask them to explain that to your prospective mortgage lender. Some lenders might be willing to process an application if they understand that another state’s laws prevent them from verifying certain information.

You may also be able to find a different mortgage lender. The best mortgage lenders might be more familiar with your state’s laws or willing to work with your employer’s policies.

Finally, there are some cases where an employer will not verify employment for other reasons. At this point, it might be time to consider getting a new job. Why won’t the employer verify your employment? Could they be doing something illegal? Does your employer have something against you? In the long run, you will likely be better off getting out of such a bad situation as soon as possible.

At What Point in the Mortgage Process Does a Lender Ask for Employment Verification?

When you apply for a mortgage, you’ll typically give the lender some financial information, including your employer and income. The lender will verify this information during the underwriting process in order to approve you for a mortgage. That process happens days to weeks before closing. However, since mortgages can take a month or two to settle, the lender may perform a second verification of employment closer to the closing date, to make sure your circumstances haven’t changed in that time.

What Happens if a Lender Cannot Verify Your Employment?

It is possible for a loan to be denied during the underwriting process, so you’ll want to do everything you can to make sure that doesn’t happen. If the lender can’t verify your employment through the human resources department, be sure to call the department and explain your situation. You can also ask the lender whether supporting documentation, such as recent paystubs, tax returns, and W-2s, will be sufficient.

What Happens if I Lose My Job or Get a New Job When Trying To Get a Mortgage?

Tell your lender right away if you lose your job during the mortgage approval process. You have an obligation to make sure your mortgage application is true and complete, and a change in employment will be of interest to your lender. Unfortunately, losing your job may affect whether your loan moves forward, but by informing your lender, you may be able to work out an alternative plan.

The Bottom Line

Mortgage companies verify employment during the application process by contacting employers and by reviewing relevant documents, such as pay stubs and tax returns.

You can smooth the employment verification process by speaking with your HR department ahead of time to let them know to expect a call from your lender. If you’re self-employed, you can have your income attested by a certified public accountant and provide IRS Form 4506-T to confirm your employment.

Reviewed by Robert C. Kelly

The marginal propensity to consume (MPC), or the ratio of the change in aggregate consumption compared to the change in aggregate income, is a key component of Keynesian macroeconomic theory. In the United States, it tends to be higher than many other countries around the world. This also means Americans tend to save less than the citizens of other countries.

Key Takeaways

• Marginal propensity to consume (MPC) is a measure of the rate of household spending.
• MPC is equal to the portion of newly earned income that is spent on consumption rather than saved.
• Historically, the U.S. has had relatively higher MPC than other countries, and therefore a lower saving rate.

Marginal Propensity to Consume

Economists and statisticians often approximate the marginal propensity to consume in the United States at between twenty and ninety percent, with a higher consumption associated with long-term changes in income. This is different than the average propensity to consume (APC), which is lower in the United States than many countries. While APC measures the portion of all income used for consumption, MPC measures the change in consumption given an increase in income.

For instance, suppose you receive a $1,000 bonus on top of your typical annual earnings. You suddenly have $1,000 positive change in income that you did not have before. If you decide to spend $400 of this marginal increase in income on a new suit and save the remaining $600, your marginal propensity to consume will be 0.40 ($400 divided by $1,000).

This higher level of consumption relative to new income is a well-studied phenomenon and has played a key role in economic policy, such as in crafting tax cuts and the low-interest rate policies 1990s and mid-2000s. In fact, marginal propensity to consume figures actually undersell the spend-heavy habits of Americans because they ignore credit cards and home equity lines of credit.

3.8%

The average percentage of Americans’ disposable income that is kept as savings.

Variations in MPC

It is often speculated that the marginal propensity to consume is higher for poorer individuals than wealthy individuals. This is because basic physical comforts, such as food, shelter, clothing and entertainment, make up a larger fraction of a poor person’s income. This tendency is not universal among people or countries. Some wealthy nations, such as Japan and Germany, have relatively low marginal propensities to consume. Likewise, many poor African and Asian countries have relatively high marginal propensities to consume.

The United States, however, is a unique case. Since the U.S. dollar is a de facto reserve currency for many central banks, Americans can essentially trade dollars for cheap foreign goods without ever having to produce an equivalent amount of goods in return. This means American savings rates can be artificially low.

U.S. vs. Rest of the World

The insurance company Allianz has estimated the average marginal propensity to consume based on select countries, which are represented below:

What’s the Difference Between MPS and MPC?

The marginal propensity to consume (MPC) represents how much of each additional dollar of income an individual will spend on consumption. The marginal propensity to save represents how much of each additional dollar an individual will save. Together, these two metrics should add up to 100%.

What’s the Difference Between MPC and the Savings Rate?

Both the marginal propensity to consume (MPC) and savings rate reflect the amount of a household’s income that is spent rather than saved. There are two main differences: First, the savings rate is based on the average savings as a percentage of existing income. Second, the MPC reflects the extra spending associated with an increase in income.

What Is the Relationship Between MPC and Income?

On average, the marginal propensity to consume (MPC) has an inverse relationship with income, meaning that people with lower incomes will spend a larger share of any extra income and vice versa. This is likely because well-off people already have most of their needs met, and have less to gain from spending the extra income.

The Bottom Line

Marginal propensity to consume (MPC) is a measure of the increased spending associated with an extra dollar of income. Generally, people with lower incomes tend to have a higher MPC because they have more unmet needs than wealthier people.