Alternatives to Bankruptcy: is Chapter 128 a good idea?

Most people don’t want to file for bankruptcy, even if they have to.  There’s a lot of stigma attached to bankruptcy, and so people try to avoid it except as a last resort.  In the process of trying to avoid bankruptcy, people try certain alternatives.  Some of them are wise efforts.  Others – not so much.
Generally-speaking, efforts to modify your budget and living without incurring additional debt are the best way to try to avoid bankruptcy without causing yourself more harm.
One of the more common tactics people use is to file a Chapter 128.  Is this a good idea?
Answer: it depends.  As with most complicated situations like this, your best options will always depend on the specific facts of your case.  No two people are identical, and what may work for one person is not always the best option for another person.  An experienced attorney can help you parse the pros and cons of various approaches to determine which is likely to be the best option for you.
That being said, it has been my experience that Chapter 128 is useful only in a small percentage of situations.  Here are some of the common reasons why:

  1. There is no eligibility for a discharge in Chapter 128.  Whatever debts you fold into the filing must be paid in full.
  2. All debts rolled into a Chapter 128 filing must be paid in full within a 3 year plan.
  3. Chapter 128s are ineffective against federal debts (like taxes or student loans) and not effective at preventing foreclosure or repossession.
  4. In contract, a Chapter 13 bankruptcy can be amortized out over 5 years with the possibility of a discharge, can cover federal debts, and can stop both foreclosure and repossession.
In short, Chapter 128 is a cheaper and simpler version of Chapter 13.  And while certain people with low amounts of debt or people who are ineligible for a discharge may benefit from Chapter 128, Chapter 128 offers fewer protections and has less flexibility where flexibility is important (you get what you pay for).  Accordingly, most people benefit from a Chapter 13 more than they do a Chapter 128, assuming Chapter 7 isn’t a viable choice for the individual (which it might be).