How to Seriously Reduce Your Mortgage During a Chapter 13 Bankruptcy

New Jersey bankruptcy attorney Edward Hanratty sent in the following guest post. It is an interesting approach to reducing mortgage debt using bankruptcy.

This is an example of a bankruptcy client who thought there was a problem with her mortgage and property taxes, and she was right. After some litigation I sent her the following proposal to resolve her mortgage dispute:

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I am writing to outline the terms of the proposed settlement of your litigation with your first mortgage servicer, and how I think it benefits you.

I have attached:
A. An amortization table for your original mortgage loan
B. An amortization table for the modified loan as proposed
C. An amortization table showing the amortization of the proposed modification if paid at your present payment rate, that is, if you continued to pay your mortgage as you have since the beginning, when it will be paid off and how much in total you will pay.

At the time of your bankruptcy filing, there was $95,777.40 in principal due, and $44,861.70 in interest due, totaling $140,639.10 due without consideration of any of the improperly paid tax payments. The bank also claimed $23,786.46 due as escrow advances, due to the error in who was supposed to pay your taxes.

A. Your original 30-year mortgage of $105,000 had at 7.75% interest rate, and with regular payments over 30 years, you would pay a total of $270,806.64 to the first mortgage lender. According to the amortization table for this mortgage, as of the present date, had all things gone perfectly, all payments made, no tax payment issues, etc., the outstanding amount on your mortgage would be $70,085.18 and over the remaining life of the mortgage you would pay $270,806.64.

B. The modified mortgage is a 30-year mortgage, beginning in 2019, which results in you paying a total of $210,851.55 to the first mortgage lender over 30 years. While the mortgage payments would last farther into the future that your original mortgage, this modification would result in a $59,955.09 savings to you.

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C. The proposal we discussed at the mediation, my notes indicate was that you would be able to maintain your present mortgage payment of 755.81, principal and interest only, but would benefit by accepting the modified loan. The benefits you would be paying off the entire mortgage 1 year and 7 months earlier than the original loan (Attachment A) and would over that period, pay the first mortgage lender $167,108.00. A savings of $103,698.64 to you.

I am supplying you with this analysis, along with the calculations underlying it, so you can perform your own calculations and make a decision. You must tell me if you want to accept this settlement and the benefits I’ve outlined above, or if you want to reject it. In my opinion, this settlement is a far better result than what you would achieve at trial, where the most the judge would award you in compensation is about $16,000.00 for the improperly processed tax payments.

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