Chapter 128 is a Valuable, Though Frequently Overlooked, Tool for Creditors & Debtors

July 27, 2020

The coronavirus pandemic is damaging businesses throughout Wisconsin, forcing many into insolvency and collapse. Navigating the pending or actual insolvency of a business is one of the most complex and demanding challenges for business owners and creditors. Bankruptcy is one answer, but it is often time-consuming and expensive. Chapter 128, Wisconsin’s bankruptcy alternative, is a valuable tool for both creditors and debtors in difficult times that is often overlooked.

Chapter 128 of the Wisconsin statutes contains three different options for individuals and businesses. First, a person, meaning an individual or business, may assign his or her assets to an assignee, who then manages the distribution of these assets to creditors. Alternatively, creditors may petition the court for the involuntary appointment of a receiver. The receiver, like the assignee, manages the liquidation and distribution of the debtor’s assets to creditors. Finally, there is a provision for the amortization of debts by wage earners. This article discusses the first and second of the three options.

Under Chapter 128, the assignee and receiver take control of the debtor’s assets for the purpose of liquidating and distributing the same. In some instances, they will continue to operate the debtor’s business. The assignee and receiver are also empowered to find and recover assets hidden or recently transferred by the debtor. The process concludes with the distribution of the debtor’s assets, including proceeds therefrom, to the creditors. Certain creditors, like unpaid employees and the federal government, take priority. For non-priority creditors, the assets are distributed to each creditor in proportion to the amount of its claims.

Generally, Chapter 128 assignee and receivership proceedings are similar to bankruptcy, but they are subject to state law rather than a uniform federal statute. Whereas bankruptcy requires the filing of disclosures and statements, as well as the appointment of a trustee, Chapter 128 foregoes many of these requirements. Chapter 128 proceedings are often completed within 90 to 120 days. This results in considerable savings of time and far less burdensome administrative expenses.

For creditors, there are many advantages to petitioning for a receivership when a debtor is insolvent or bordering on insolvency. First, the receivership can be created before the petitioning creditor has a judgment against the debtor. Second, the receivership imposes a predictable structure on what is otherwise a chaotic situation as creditors compete for their share of the debtor’s assets. Third, the receivership process has protections against transfers of the debtor’s assets for the purpose of avoiding creditors. Finally, a receivership will often be less expensive and time-consuming than typical collection actions like garnishment and execution on property.

As mentioned, Chapter 128 is also beneficial for debtors. As debts start to exceed assets and income, debtors will be beset by lawsuits and attempts at collection. An assignment avoids this pandemonium by engaging an orderly process for the distribution of the business’s assets. As an example, the court can halt other proceedings by creditors against the debtor. Additionally, Chapter 128 allows the debtor to select the assignee, which means the debtor can select someone it knows can maximize the value of its assets in resolving debts. This expertise in combination with the other protections of Chapter 128 can help a debtor-business survive insolvency and resume normal operations.

Ultimately, Chapter 128 is a tool for securing the orderly liquidation of assets of an insolvent debtor. Creditors facing struggling debtors should consider petitioning for a Chapter 128 receivership rather than engaging in typical collection attempts. Oftentimes, a receivership will be the creditor’s best chance at recovery in dire circumstances. Similarly, debtors should consider a Chapter 128 assignment as a means of wrapping up their business. Axley is experienced in guiding creditors and debtors through the Chapter 128 process.

Jeremy Lange
Jeremy Lange