128k soudns horrid. Avoid at all costs.
My Alfa - 2008 159, so potentially similar system, doesn't care about bitrate. None of my music is as low as 128 (but some is 160, 192, 256, 320, not sure if there is any VBR mind) and the Alfa is happy with it. As you've found out, it doesn't do aac / m4a / apple formats.
It doesn't even seem to care about folder structure.
What it doesn't seem to like is some USB sticks. Some simply never work, no matter what you do with them. I use a Sandisk Fit (tiny thing) which I think is about 8GB, and it's been faultless for 4+ years in there.