Monthly Archives: July 2013

Chapter 7 vs. Chapter 13 Bankruptcy – Which Option is Best for You?

When filing for bankruptcy, you will have the option to file a Chapter 7 or a Chapter 13 bankruptcy.  Choosing the type that works best for your situation will mean the best chance at a successful recovery.  However, it’s important to understand the difference and special features of each type to make the best choice.

Chapter 7 Bankruptcy

A Chapter 7 is the most common form of bankruptcy, often referred to as a “straight bankruptcy”, and is a complete liquidation of assets.  This is the fastest option, often resulting in discharge within four months.  Individuals are eligible to file a Chapter 7 bankruptcy once the Chapter 7 means test is passed, proving low disposable income.  In this type of insolvency, nonexempt assets are sold to pay creditors.  Any remaining debts, once creditors are paid from available assets, are discharged. 

This option may be best for individuals who are not homeowners, have few assets, or low income.  While discharge can be achieved quickly in a Chapter 7, it’s important to remember that a bankruptcy stays on a credit record for 10 years.  The Chapter 7 option also does not provide a way to catch up on missed payments and may not prevent a foreclosure or repossession. 

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is less common, but offers an alternative to liquidating assets.  This option creates a plan for repayment of debt over a period of several years and is considered a reorganization of debt, not a liquidation.  Once approved by the court, creditors must not contact the individual for repayment, thus ending the harassing phone calls. 

In a Chapter 13, individuals must meet certain eligibility conditions regarding the amount of secured and unsecured debt.  Filers are able to keep property, catch up on missed payments and sometimes even bring down the principal loan balance through a loan cramdown.

The Chapter 13 option is best for individuals who make a regular income and for those who earn too much to qualify for a Chapter 7.  It’s also best for those who wish to keep property and avoid foreclosure or repossession and can commit to a payback plan. 

Credit Counseling & Debtor Education

In both Chapter 7 and Chapter 13 bankruptcies, filers must complete pre-filing credit counseling and post-filing debtor education.  The first course provides an overview about alternatives to bankruptcy.  The second course offers financial management tips and advice for recovering after bankruptcy.  Sage Personal Finance is partnered with Abacus Credit Counseling ( to provide the first course and offers the second course at  

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Is Bankruptcy the Right Solution?

While many people often feel overwhelmed by debt and bills, it can be difficult to know when filing bankruptcy is the right solution to financial trouble.  It’s important to understand the types of bankruptcy, how filing will affect your life and the best time to file.

Taking Inventory

First, if you’re unsure of exactly how much you owe or how much money you have to pay off your debt, performing a financial inventory will help to put your situation into perspective.  Make a list of all assets, including: bank accounts, equity in your home if you’re a homeowner, vehicles, investments and savings.  Next, total up all outstanding and monthly debts.  Include debts that you are making payments on as well as any that you may no longer be paying. 

There is no magic number or amount of debt that will indicate when to file for bankruptcy.  It’s a very personal situation for every filer.  If your debts total more than you can afford to repay, it may be time to consider bankruptcy.

Chapter 7 Bankruptcy

The most common form of personal bankruptcy is Chapter 7.  This type of bankruptcy liquidates your assets to settle as many of your debts as possible.  However, it’s important to understand that some assets may be protected, including possibly your home and your vehicles.  Retirement accounts may also be protected.  However, if you withdraw your funds from an IRA or 401K, and place them into a regular savings account or checking account, they may no longer be protected and may be used in a bankruptcy to settle debts.

Chapter 7 bankruptcy offers a quick solution to financial problems for many people, often resulting in discharge within four months.  While the incident will remain on your credit report for 10 years, some people are still able to obtain credit and even purchase a home with recent bankruptcies. 

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy offers a longer term solution that may be a better option for individuals with personal property, a small business, or any other assets that they wish to keep.  With this type of bankruptcy plan, filers are given several years, once approved, to continue to pay all outstanding debts.  During the grace period, creditors must cease all communication.  At the end of the period, any remaining debt is discharged. 

This is a good option for anyone with a predictable annual income.  However, it can be daunting to commit to a three to five year plan and many filers who start with a chapter 13 switch to a chapter 7.


It’s important to remember that not all debts are discharged by bankruptcy.  Secured loans, such as a car loan, mortgage, student loans and child support may not be discharged through bankruptcy.  However, as long as payments continue to be made, filing bankruptcy can prevent a vehicle from getting repossessed and a home from being foreclosed upon.

Credit Counseling and Debtor Education

No matter which type of bankruptcy you choose, you will be ordered to complete two courses prior to discharge.  Before filing, you will be asked to complete a credit counseling course which provides information about alternatives to filing bankruptcy.  After filing, you will be required to complete a two-hour debtor education course.  This course focuses on financial management and recovery after bankruptcy. 

Sage Personal Finance offers the required debtor education course for both individual filers and joint filers.  Learn more about Sage’s highly rated program and get started today.

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Know the Effects of Divorce on Your Bankruptcy and Mortgage

A great advice column on how divorce can effect your mortgage responsibilities – what creditors do and do NOT recognize in a divorce proceeding.

Read the full article here.

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July 3, 2013 · 10:20 am