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How Does Chapter 128 Affect Your Credit?

Several people in the United States are financially struggling in the current economy, especially after suffering from the unaccounted repercussions of the COVID-19. Many have even started to wonder whether it is wise to file for bankruptcy relief to rectify their financial standings. After all, filing bankruptcy papers is the last resort for thousands of people who have tons of liabilities to think about but not enough resources to make an adequate repayment plan.

However, it’s also true that a more significant portion of these individuals feel hesitant to make this final call since they fear what it could do to damage their future financial security. This valid long-term concern leads them to look for bankruptcy alternatives that could save them from their otherwise inevitably unredeemed fate.

Fortunately for Wisconsin residents, they have a much better option than undergoing bankruptcy, that is, filing for a Chapter 128 debt consolidation. If you’re wondering what Chapter 128 is, how it works in Wisconsin, and how it affects your credit card report, we have you covered in this article!

You can read on to learn everything about the topic at hand in great detail:

What is Chapter 128?

In simple words, Chapter 128 is a form of debt consolidation. It refers to the situation when “a debtor fills out a relatively straightforward petition to reorganize and consolidate several debts, paying them off over three years, treating them as one. Moreover, an affidavit needs to be filled out by the borrower to list down the selected debts that they wish to include in the deal.”

On the other hand, debt consolidation means “combining multiple debts into one account to pay them off on lower interest rates, considering them as one source of liability.”

It’s also crucial to understand that Chapter 128 debt consolidation only covers unsecured debts. Moreover, by unsecured loans, we mean “any debt, liability, or general obligation not backed up by collateral or protected by a sponsor.”

For example, suppose a debtor fails to make timely repayments and defaults on their loan. In that case, the creditors may not recover their investment when the borrower has not offered any of their assets as collateral when taking out the required loan. This high risk for lenders is also the primary reason why unsecured debts have significantly higher interest rates than collateralized debts.

A few examples of unsecured loans covered under the Chapter 128 plan are credit cards, personal loans, medical bills, speeding tickets, rent payments, and late utility payments. In comparison, secured debts consist of debts like mortgages, auto loans, and home equity loans.

How does Chapter 128 debt consolidation work?

Wallet with coins banknotes and credit card for payment

All in all, it is a reasonably quick and easy process in Wisconsin to file for a Chapter 128 debt consolidation. All you’re required to do is record a petition that announces your motive (that is, filing for Chapter 128) and attach an affidavit with it to classify all the debts that you would like to reorganize. As mentioned earlier, these debts may include all kinds of unsecured loans, from credit cards and medical bills to rent payments and payday loans.

In short, you must ensure not to list down any secured loans in the affidavit since they are not accepted during Chapter 128 proceedings.

Additionally, as the debtor, you must acknowledge making timely repayments to the creditors to cover all your obligations during the agreed-upon timeline. When filing for Chapter 128, you must also enlist all information regarding your trustee, assigned to you by the court, who’s willing to help you during this entire process.

Once that’s done, you and your trustee can sum up the total amount of unsecured debts, append the trustee fees along with it, and then divide the final figure by thirty-six. This leads you to a monthly repayment plan that you can follow for the next three years to cover your debts.

The delineated information is submitted to the court afterward as the process is carried out in whichever county of Wisconsin the borrower lives in. Followed by that, the court issues the mandatory protective order, which is primarily set in place to prevent any interest from accruing on the unsecured loans. Plus, it protects the debtor from wage garnishment and asset attachments by the creditors while they make the repayment.

This is where you should note that besides cutting off the extra interest charges, Chapter 128 doesn’t offer any debt relief to borrowers.

After that, all monthly payments are transferred from the borrower to the trustee as per the Wisconsin court order. However, suppose the debtor still fails to make timely repayments after the debt reorganization process and defaults on their loan. In this case, they might become subjected to the incurred interest, which was initially forgiven for the three years while the repayment plan was in effect. Not to mention, the incomplete repayment plan triggers associated debt agencies into resuming their contact with the borrower, recommencing collection actions.

Moving on, before we begin to discuss how Chapter 128 debt consolidation differs from filing bankruptcy papers, let’s go over what bankruptcy is to clear all uncertainties.

What is bankruptcy filing?

Petition to File For Bankruptcy

When an individual or an organization fails to honor their financial obligations, not making timely payments to the creditors, they might feel the need to file for bankruptcy. In this process, a petition is carried out in the court where the struggling business’ or individual’s outstanding debts are calculated precisely. Afterward, the debtor’s assets are taken into account to contemplate how much can be liquidated to at least partially pay off the creditors.

After considering this situation in detail, it doesn’t come as a surprise that filing for bankruptcy doesn’t go down well with the borrower’s credit report history. An adverse credit score makes it significantly challenging for them to start afresh since it more or less nullifies their chances of acquiring an adequate loan again in the foreseeable future. Nevertheless, we also can’t deny that when debtors file for bankruptcy relief, it does save them from a ton of present financial trouble.

Having said that, it’s crucial to receive a free consultation from a bankruptcy lawyer or a professional beforehand to save yourself from making any regrettable final decision. That’s because the finance experts can always give you better advice for dealing with your particular situation when there is, in fact, another solution besides bankruptcy filing.

Moreover, in Wisconsin, three central chapters are discussed under bankruptcy filings, including Chapter 7, Chapter 11, and Chapter 13. Let’s go over them briefly to understand how they’re connected to bankruptcy and Chapter 128.

What is Chapter 7 bankruptcy?

According to the U.S. bankruptcy law, any individual or an organization to file for a Chapter 7 bankruptcy must have their assets liquidated to repay their debts. In this case, the debtor’s debt amount is wiped off as soon as they file for bankruptcy. Moving on, the trustee has to gather one’s non-exempt assets (assets that can be sold by a trustee assigned to your case by the court) and use their proceedings to fully or partially pay off the amount owed to the creditors. This may also result in the loss of all your properties.

In most cases, filing for this type of bankruptcy doesn’t affect one’s bank account as long as an exemption protects the money in that account.

What is Chapter 11 bankruptcy?

On the contrary, a borrower can negotiate the terms and conditions of their debts in Wisconsin when filing for a Chapter 11 bankruptcy. Moreover, there’s no need to liquidate one’s exempt or non-exempt assets when that’s not what the borrower wants. Although large entities, such as new businesses, typically pursue this form of bankruptcy, the option is also available to individuals with a significant debt under their name.

Furthermore, when the debtors file for Chapter 11 bankruptcy, the newly proposed plan they suggest to reorganize their debts must remain in the best interest of the associated creditors. If the borrower fails to present such a plan, the creditors have the right to propose one instead.

What is Chapter 13 bankruptcy?

When you, as the borrower, file a Chapter 13 bankruptcy, it’s imperative to propose a repayment plan stretching over three to five years. The monthly repayments are made with consistency to the trustee assigned to your case by the court. In turn, your money is delivered to the creditor to whom you owe money.

While some creditors are paid in full, others only require partial payments. What you owe after filing for bankruptcy depends on the kind of debts you have accumulated so far. For example, the debts you must pay in full to your creditor by the end of your repayment plan include “priority debts” and any “arrearages on your property” that you want to keep.

The priority debts consist of all federal and state back taxes, including child support that you may owe to your ex-spouse. The latter includes any mortgage or auto loan payments that you haven’t paid in full.

On the other hand, the amount you have to pay back on unsecured loans under Chapter 13 bankruptcy can amount between zero to hundred percent, depending upon different factors. Ultimately, the court must look upon what you owe to your creditors from these debts.

How does Chapter 128 debt consolidation differ from bankruptcy?

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Now that you understand the concept of bankruptcy in detail, you may tell why it’s essential to differentiate this terminology from Chapter 128. Since both of these financial happenings are implemented for a similar purpose (to give oneself a semblance of financial stability), several people tend to confuse these with each other.

In particular, most individuals can’t establish what makes Chapter 128 differ from Chapter 13 bankruptcy. After all, the debtor is given a few years to pay off their obligations in both occurrences. Therefore, to put things into further context, we will distinctly clarify the differences between both terminologies in this section:

1 – Simpler process

To begin with, the process of Chapter 128 is far simpler than filing for Chapter 13 or any other bankruptcy. That’s because, unlike bankruptcy, the filer doesn’t have to declare all their debts, liabilities, and assets in the affidavit during a Chapter 128 proceeding. Instead, it’s only required to announce those unsecured debts during the process that they want to restructure.

Additionally, you don’t have to produce or file income tax records, go through the mandatory free counseling related to credit dealings, or go to court yourself during a Chapter 128 debt consolidation.

2 – Secured vs. Unsecured debts

Not to mention, bankruptcy allows you to declare all your secured debts as well, which is not permitted during Chapter 128 proceedings.

3 – Debt relief

Chapter 128 debt consolidation doesn’t necessarily offer all benefits of bankruptcy. Case in point, debt relief is one of the prominent factors of bankruptcy that attracts people into taking that route. While it is not the most favorable decision for their future financial stability, the short-term relief is enough to get most people to file for bankruptcy.

For example, people filing for Chapter 13 bankruptcy may receive debt relief that eliminates a large chunk of their debt, taking them off the hook. In other words, the debtors may end up paying only a tiny part of their accumulated debt compared to what they owed in full. On the contrary, people filing for Chapter 7 bankruptcy may get the ultimate debt relief by paying absolutely nothing on certain liabilities.

Compared to these proceedings, Chapter 128 doesn’t provide any debt relief besides cutting off interest rates while you pay off their obligations in full, be it for a long time stretching over three years.

4 – Repeat filing period

Furthermore, any borrower can repeatedly file for Chapter 128 debt consolidation without encountering any time or period restriction. On the other hand, Bankruptcy filing comes with limitations regarding how much time must pass before one could file for it again.

Finally, in the next section, we will talk about how, or if, Chapter 128 affects your credit score or credit report in any way compared to bankruptcy.

Does Chapter 128 debt consolidation affect your credit card history?

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A Chapter 128 debt consolidation is not bankruptcy and nor is it credit counseling. Case in point, you can pay off all your debts in full by the end of your repayment plan when filing for a 128 debt consolidation. That’s also why it does not affect your credit report or credit score like a bankruptcy typically does. Although, if you fail to follow your repayment plan and default on your loans, there might be several credit repercussions you may have to deal with.

Moreover, since Chapter 128 is not a bankruptcy, you should ensure that your creditors don’t report it as one as well. Unfortunately, some lenders don’t understand the concept of 128 as clearly, and therefore, they incorrectly report it.

Nevertheless, you can divert this mishap by opening up a dispute with the credit bureau. Ultimately, it would help if you always took your time finding an attorney or a bankruptcy lawyer who knows what they’re doing to prevent such misunderstandings.

Wrapping it up

In bankruptcy, you are allowed significant debt relief, and it saves you from paying a great deal of debt. Nevertheless, it also shows on your credit report for a long time and negatively affects your credit score.

On the other hand, you cannot acquire such debt relief during a chapter 128 plan, so you have to pay off your entire loan by the end of your repayment period. When you don’t default on your monthly payments and clear all your unsecured loans diligently, nothing negative remains on your credit report to affect your credit score in the end.