MILWAUKEE WISCONSIN JOURNAL SENTINEL
POSTED: JULY 5, 2010
Chapter 128 filings on the rise in Wisconsin
Unique law, free of oversight, allows debtors to bypass bankruptcy
By Bruce Vielmetti of the Journal Sentinel
Debtors who can't get ahead of their bills and want to avoid bankruptcy enjoy a unique alternative in Wisconsin - and they're using it in record-breaking numbers.
Petitions under the state's debt amortization law doubled in Milwaukee County from 2008 to 2009. This year, they're on pace to more than double again. Through the first six months of 2010, more than 1,400 people have filed, compared to just over 1,000 all of last year.
The onslaught has court officials scrambling to figure out whom to add to a list of approved trustees to administer the cases, which have little court oversight.
"It's just exploding at the moment, because it was under the radar," said Milwaukee County Circuit Judge Timothy Dugan. Filings also are up sharply in Waukesha, Racine, Ozaukee and Washington counties, though with many fewer cases filed.
While proponents tout the option as the faster, cheaper and simpler way get debt under control, others caution that it doesn't come with the full protections of federal bankruptcy, doesn't require credit counseling and leaves many debtors who fail to meet their repayment plans just where they started - minus fees to lawyers and trustees.
The quirky Wisconsin provision, known as Chapter 128, dates back to the 1930s but began gaining popularity among individual debtors only in the past decade. Most of the statute is aimed at receiverships for small businesses, but one section applies to individual debtors.
Many people learn of the provision from lawyers' ads, Internet searches, debt counselors and word-of-mouth. But as more people file Chapter 128 petitions, some wonder if it's being oversold and becoming just another way to make money off financially challenged individuals.
In Milwaukee County, statistics show fewer than half of the debtors who file will likely complete their repayment plans, though statewide the figure is higher
The procedure differs from bankruptcy in key ways.
Instead of declaring all debts, income and assets, a debtor can consolidate just the debts he or she wants to manage. Late rent, utilities, payday loans, credit cards, speeding tickets and medical bills can all be run through Chapter 128, though not secured debts like mortgages or car loans. The procedure stops interest and late fees from accruing, stops creditors from garnisheeing wages or attaching assets, and stops utilities from cutting off power or heat.
Debtors don't have to file tax returns, get credit counseling or even go to court. Petitions are submitted by mail. It only costs $35 to file, less in counties outside Milwaukee. Debtors can file repeatedly.
A trustee adds up all the bills, plus 7% to 10% for his or her fees - maybe an attorney's fee as well - divides by 36 and comes up with a three-year monthly payment. The debtor sends the money each month to the trustee, who pays prorated amounts to the creditors.
Creditors can object to a trustee's plan, but virtually never do. Judges sign off on the plan at the start and when it's completed, or dismiss it if debtors miss payments.
Jeff Murrell, a Milwaukee lawyer who represents petitioners around the state, said creditors prefer the process to bankruptcy because it means they're getting paid something rather than nothing, even if it takes longer.
One popular use of Chapter 128 is to force We Energies to keep delinquent customers connected. As soon as the utility's winter moratorium on disconnections ends each spring, Chapter 128 cases spike, said Gail Woodworth, a legal assistant who works with those petitions.
Terrence Cerni, a We Energies lawyer, said the law "is what it is." While he expects some people may use repeated Chapter 128 petitions to game the system, it's not a significant number.
"Our experience is, we have a high degree of pays," Cerni said.
The key player in the Chapter 128 process is the trustee, yet the law doesn't specify who can be a trustee or set any kind of licensing or certification requirements, even though they may administer millions of dollars.
That concerns Milwaukee County Circuit Judge Mel Flanagan, who heads the civil division.
"There could be fraud or incompetence," she said, though so far, the few trustees who handle the vast majority of state cases have not generated complaints.
Nancy Wixom of Janesville said she's been acting as a trustee for about 12 years and handles about 120 cases as a sideline to her job as a controller for a collection agency.
"It's not really a money maker," she said. "I do it as a service."
She is surprised the job isn't more regulated, but notes that she's bonded to $1&enspmillion and has a good track record.
"It's always been a smooth sail, and we've never been questioned," she said.
Wixom said judges used to request reports of her receipts and disbursements, but don't anymore.
Sandie Miske is another high volume Chapter 128 trustee. She lives in the tiny village of Pound, about 40 miles north of Green Bay. She worked for finance companies for 12 years - "getting people into debt," she said - before she quit to start a credit counseling service.
She learned about Chapter 128 in 1994 from a client and became trustee on the first case filed in Brown County in decades. Now, she and her staff of three keep an active caseload of about 500, she said, with an average tally of about $16,000.
That would translate into more than $500,000 a year in fees.
Miske has done only a few cases for debtors who file without a lawyer. She said all but one didn't complete the plan, and she thinks debtors should not be allowed to file on their own, or "pro se."
"They don't know what they're doing," she said. "They include debts they shouldn't. They're way too much work."
Alicia Navarrete of De Forest began acting as trustee in Chapter 128 cases last year, she said, at the request of some lawyers who knew she spoke Spanish. She also runs a tax service, cleaning service, does books for her husband's construction company and offers assistance on immigration paperwork.
She's also familiar with debt, having been discharged from Chapter 7 bankruptcy in 2008.
"I know the courts are taking a risk in allowing us to handle all these people's money," she said, but added that she has business liability insurance.
Dugan said Milwaukee lawyer Mont Martin and Susan Schuelke, a former receptionist and bank teller in Outagamie County, handle the majority of the county's cases. Schuelke's website indicates she administers about 350 cases. Martin would not disclose his case load.
"We're trying to set up standards and procedures, to examine exactly who should be on the list and how," Dugan said. "If someone wants to, we're open to having people added to the list."
Some bankruptcy attorneys remain wary of Chapter 128. They point out that it does not offer as much protection as Chapters 7 and 13 in the federal bankruptcy code. And because it's so unusual, sometimes Wisconsin debt amortization plans still wind up on credit reports as bankruptcies.
Nor does it eliminate any of the debt.
"You can't cram down or strip down the debt," said Richard Check, a bankruptcy attorney based in Milwaukee. "In Chapter 13, you might pay pennies on the dollar. In Chapter 7, maybe nothing."
Many people who might turn to Chapter 128 probably could do better by going to nonprofit credit counseling services, Check said, which can negotiate interest rates down to single digits and a five-year payback plan, while also educating debtors about credit and budgeting.
Bill Druliner, a regional manager with one such service, GreenPath, said several people wind up with them after trying Chapter 128.
"It seems like many don't fully understand what they're getting into," when they sign up for debt amortization, he said. There are specific scenarios where it might be the best option, Druliner said, but it generally doesn't fit into GreenPath's discussions with its clients.
The law allows lawyers to collect their fees ahead of other creditors in a Chapter 128 plan, except in Milwaukee, where judges adopted local rules against the practice. Now, lawyer fees of from $350 to $700 for a typical case get paid pro rata like other creditors and the trustee - unless the lawyer collects the fee up front.
Martin, the Milwaukee lawyer and trustee, said more lawyers would be willing to do Chapter 128 for clients if they could get paid first in the payment plan. He expects that and other aspects of the law could be amended over the next few years if individual debt amortization continues to grow in popularity.
More debtors are filing without lawyers, according to judges and Amy Wochos, who heads the self-help legal clinic at the Milwaukee County Courthouse.
Wochos attributes the growing interest in debt amortization to the extended recession and word-of-mouth, which isn't always accurate.
"We do a little tempering of expectations," about Chapter 128, she said. "And, as is always true, some people just overspend."
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