The Joyce Smith Case – Declaratory Judgment re: Chapter 128s & Utility Disconnections

I have had many clients over the years inquire about alternatives to bankruptcy, specifically Wisconsin’s unique “Chapter 128”.  Chapter 128s are cheaper, faster, simpler, and impose fewer requirements on the debtor, compared to federal bankruptcy.  However, they also offer far fewer protections.  Namely, all debts must be paid in full within 3 years.  There is no chance of discharge.  There is no stay against repossession or foreclosure.
So limited are the protections of Chapter 128, that I have found only three scenarios in which I would consider recommending them to my clients:

  1. When the client’s debt is so low, that the cost of a federal bankruptcy would outweigh the benefit.
  2. When the client is ineligible for a discharge, even under Chapter 13, due to a prior bankruptcy, and has no secured or priority debts worth curing in bankruptcy.
  3. The client is facing a utility shut-off and cannot afford the time or expense necessary to file bankruptcy.

That is, until now.  Milwaukee County Circuit Court Judge, the Hon. William S. Pocan issued a declaratory judgment sought by WE Energies.  The case is 11-CV-8212, In the matter of the Voluntary Amortization of Debts of Joyce S. Smith.  The judge ruled that Wis. Stat. § 128.21 enumerates several collection actions that are prohibited when a petition is filed, and disconnection of utility services (or failure to reconnect) is not listed among them.  Therefore, under the plain-meaning of the statute, Chapter 128 no longer prevents a utility disconnection, nor does it guarantee that disconnected utility services will be reconnected.  And remember, this decision is not just for WE Energies.  Expect Wisconsin Public Service (WPS), Alliant, and Wisconsin Power & Light (WP&L) to exercise their newly spelled-out rights pursuant to this judgment.
Debtors facing utility disconnect must either bring the account current or seek federal bankruptcy protection.

401(k) Contribution Conundrum of BAPCPA

For the last 6 years, bankruptcy attorneys have been mocking the Bankruptcy Abuse and Consumer Protection Act of 2005 for all of its flaws.  Yesterday, I encountered one more.
11 U.S.C § 541 exempts 401(k)’s as property of the bankruptcy estate.  Accordingly, future income devoted to a 401(k) is also exempt, and therefore, is an allowable deduction on the Chapter 13 Means Test, Form B22C (because future income is property of the estate in Chapter 13s to fund the proposed repayment plan).
However, since projected disposable income is not an issue in Chapter 7, voluntary 401(k) contributions are NOT an allowable expense on the Chapter 7 Means Test, Form B22A.
So here’s the scenario…  Above-median debtor cannot beat the presumption of abuse on the Chapter 7 Means Test because his 401(k) contributions are not an allowed expense.  Accordingly, he does not qualify for Chapter 7.
However, if the the debtor converts to Chapter 13, he has a negative disposable monthly income because his 401(k) contribution is an allowed expense, and that expense drops him below the threshold.  Meaning his Chapter 13 Plan would require no payments whatsoever.
Doesn’t qualify for Chapter 7.  Chapter 13 would be pointless.This was such a bizarre result that I had to confer with my colleagues to make sure I wasn’t missing something obvious.  Turns out I wasn’t.
What a stupid law.