If your client is considering filing for Chapter 13 bankruptcy, they need to know every detail about that decision — the good and the bad. Here we go over how you can advise your client to steer them in the right direction as well as alternatives to try before they pull the trigger on filing for Chapter 13.
The Pros of Chapter 13 Bankruptcy
First, it’s important to let them know the ins and outs of chapter 13, its implications, and what to expect before, during, and after the process. Helping them understand these aspects are crucial to their decision-making process, especially if they decide to try alternatives before filing.
Here are some positive things your client should know about chapter 13 bankruptcy:
- Debt repayment: chapter 13 bankruptcy allows somebody with stable income to pay down parts or all of their debt over the course of 3-5 years by renegotiating payment periods and amounts with creditors.
- Common uses: the most common use for chapter 13 bankruptcy is to defer mortgage payments in an attempt to halt foreclosure proceedings. Although chapter 13 gives opportunity to rearrange payment plans, the mortgage will still need to be paid in full eventually.
- Eligibility: the majority of people, even the self-employed, are eligible for chapter 13 as long as their unsecured debts total to less than $394,725 and their secured ones total less than $1,184,200. Keep in mind that a corporation cannot file for chapter 13.
- Time: chapter 13 essentially buys you more time to pay off your debts in a more manageable way by reducing payments or stretching them out over longer periods.
The Cons of Chapter 13 Bankruptcy
Following the route of chapter 13 should be a last resort to those struggling financially. This is because oftentimes the cons outweigh the pros, unless the person filing is in specific circumstances. Here are just some of the drawbacks of filing for chapter 13:
- Timeline: it can take up to 5 years to repay the debts owed, which directly affects the rest of your finances.
- Credit building is harder: because it takes so long to repay debts during chapter 13, the filer has no opportunity to improve their credit history. Even though it’s much easier to explain to creditors that you filed for chapter 13 than it is to explain that you’ve been sued by previous lenders, chapter 13 will remain on your credit report for 10 years, calling your financial stability into question. This results in not only being unable to improve credit for up to 5 years, but also being unable to access low interest rates and other lines of credit even once you’re finished with chapter 13.
- Liens: even once you’re finished with the chapter 13 process, you’re still obligated to pay down any liens that were placed on your property.
- Alimony/child support: filing for chapter 13 will not relieve you of your duty to pay alimony or child support.
- Credit cards are taken away: once you’ve filed for chapter 13, you will lose all of your credit cards for that period. Once you’re eligible to apply for credit once again, you will only be able to access those with higher interest rates.
- Mortgage eligibility is lost: if you’ve been eyeing a new house, forget about it once you’ve filed for chapter 13. Mortgage lenders won’t touch you with a 10-foot pole while you’re in the throes of chapter 13.
- Inability to file for other bankruptcies: if you’ve filed for chapter 13 within the last 6 years, you will not be able to file for chapter 7 bankruptcy, which allows you to liquidate unsecured assets to pay back debts.
Home Sale-Leaseback: An Alternative to Chapter 13 Bankruptcy
Home sale-leaseback programs have been on the rise in the US. Essentially, they allow financially struggling homeowners to access their home’s equity in order to pay down debts all while they get to stay in their home. SKYDAN Equity Partners offers one such program. Here is a side-by-side breakdown of SKYDAN’s equity program vs chapter 13 bankruptcy:
|SKYDAN’s Program||Chapter 13 Bankruptcy|
|Program lasts 2 years, maximum||Lasts 3-5 years, minimum|
|Program is designed to help homeowners build credit while paying down debts||Hard to build credit, even after the program is finished|
|Keep all lines of credit open and accessible; makes it easier to find good interest rates in the future||Takes away credit cards and makes quality credit lines difficult to access|
|No damage to records or credit history||Stays on record for 10 years and makes filing for other bankruptcies harder|
|Allows you to pay for any debts or expenses, including medical bills, student loans, credit card debt, and mortgage debt||Unable to pay down student loans|
|Doesn’t care about credit history or employment history||Requires explanation to judge or other official on how you got into your situation|
SKYDAN’s Home Sale-Leaseback: How it Works
If your client is searching for financial relief, SKDYAN’s home sale-leaseback program may be right for them. Featured in Crain’s Chicago Business, this program allows homeowners to access their home’s equity in order to pay down debts, without having to sell or leave their home. This allows them to pay for any life expenses, thereby improving credit and bulking up cash reserves.
Here’s how it works:
We buy the home and in return give the homeowner a large sum of cash, with which they pay off existing debts (property taxes, credit card debt, medical bills, etc.). They then lease the home back from us for up to 24 months with deferred rent payments. This means that while they’re leasing the home back from us, there are no monthly payments, no interest paid, and no added debt.
At the end of the 24-month period, they have two options:
Purchase the home back (original price + deferred rent)
Sell the property, keeping all additional equity
We don’t care about credit score, employment history or debt-to-income ratio. We are here to help homeowners improve their finances, not add to their debts. The only thing they need in order to qualify for our program is to have enough equity in their home.
Give us a call today for a consultation or to learn more.