In the current economic environment, many people are struggling to pay their bills every month. As the bills mount, they may wonder what they should do and whether bankruptcy is a viable option. For many, it is, but for others, it is not. Fortunately, Wisconsin residents have an alternative process for debt relief.

Wisconsin Statutes section 128.21 provides an alternative form of debt relief for Wisconsin wage earners who do not qualify for federal bankruptcy. Section 128.21 (also referred to as “Chapter 128”) is less expensive and easier than bankruptcy. Similar to Chapter 13 bankruptcy, it allows debtors to pay debts over time (up to three years) according to a repayment plan.

How Chapter 128 Works

The debtor starts the process by filing a petition in the circuit court of his or her county of residence. The petition should include the names and addresses of any creditors who have levied executions, attachments or garnishments. W.S.A. § 128.21(1). There is a small filing fee.

Like in bankruptcy, the filing of a petition under this section creates an automatic stay, which prevents creditors from trying to collect from the debtor by garnishing wages or attaching property. There is one exception to the automatic stay. A creditor may sue the debtor and obtain a judgment, but the creditor cannot try to collect on it. Rather, the creditor should notify the trustee of the judgment, and the trustee will adjust the amount of the debt and arrange for payment to the creditor. W.S.A. § 128.21(7).

After the petition is filed, the court appoints a neutral trustee, who meets with the debtor and makes a list of the creditors and amounts owed to each. The trustee notifies the creditors of the amounts listed by the debtor and about a meeting to consider the repayment plan. W.S.A. § 128.21(3). After that meeting, the trustee will either report to the court that no plan is feasible, in which case the court may dismiss the proceedings, or recommend a plan to pay the creditors within three years. W.S.A. § 128.21(3)(a) & (b). If the trustee recommends a plan, the court may enter an order approving the recommended plan and setting the claim amounts. W.S.A. § 128.21(3r). If a creditor objects to the proposed plan, the creditor can request a hearing. At that hearing, the court will approve the plan as is, dismiss the proceedings or approve a modified plan. Id.

Unsecured debts can be included in a section 128.21 plan. Unsecured debts are things like overdue utility bills, medical bills, fines imposed by Wisconsin, civil judgments and overdue rent. The plan can also include secured debts (such as house and car loans).

The debtor makes payments to the trustee, who then pays the creditors. The trustee is entitled to deduct compensation of between 7 and 13 percent of the debtor’s payments. W.S.A. § 128.21(4).

If the debtor’s payments are more than 30 days overdue, the trustee can report this to the court and suggest a course of action. The court can dismiss the proceedings or extend a grace period in which the debtor must pay. W.S.A. § 128.21(5).

If the court approves, creditors can be added to or removed from the plan. If the debtor abuses section 128.21, the court may dismiss the case or impose other sanctions. An example of abuse is if the creditor makes preferential payments to a particular creditor.

No Discharge of Debts

There is no discharge of debts under section 128.21. The debtor must repay all debts that are outlined in the plan. In bankruptcy, most debts that remain unpaid after Chapter 7 or that are not dealt with in a Chapter 13 plan are discharged, meaning that the debtor has no further obligation to pay them. There are some types of debts such as taxes and domestic support obligations (child support and alimony) that are nondischargeable and remain valid in bankruptcy.

A Good Alternative to Bankruptcy

Section 128.21 is a good alternative for those who do not qualify for bankruptcy. Seeking debt relief under section 128.21 is less expensive and less complex than bankruptcy because there are not as many filing requirements as Chapter 7. For example, there is no means test, no mandatory debt counseling and no requirement that the debtor submit property schedules and financial statements.

In addition, section 128.21 may not have as great an impact on the debtor’s credit report as a bankruptcy, which typically remains on a credit report for about seven to 10 years. If the debtor has paid all debts at the end of the plan, the credit report will typically classify the debts as I7 or R7, which means that they were paid by making regular payments under a wage earner or similar debt consolidation plan.

Talk to a Wisconsin bankruptcy lawyer for more information about Chapter 128 and other debt relief options.