Cite as: Keith M. Lundin, Lundin On Chapter 13, § 12.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
The drafters of the Bankruptcy Reform Act of 1978 contemplated that pensioners would seek relief under Chapter 13.1 Courts have recognized that benefits from a retirement plan can constitute regular income for eligibility purposes.2
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)3 sent a mixed message about the use of pension income as “regular income” for eligibility purposes. Detailed elsewhere,4 by amendments to § 541, “any amount . . . withheld by an employer from . . . wages” for a qualified employee benefit plan or retirement account is excluded from property of the estate, and “such amount . . . shall not constitute disposable income as defined in § 1325(b)(2).”5 In addition, § 1322(f), as amended by BAPCPA, excludes from projected disposable income “any amounts required to repay” a loan from a qualified pension plan described in § 362(b)(19).6
These statutory changes by BAPCPA signal (unclearly)7 congressional intent to exclude pension and retirement contributions8 from property of the estate and telegraph that the income used for pension and retirement contributions or to repay a qualifying pension loan is not income committed to unsecured creditors at confirmation through the projected disposable income test.
But what do these new provisions tell us about retirement income and “regular income” for eligibility purposes? On the one hand, that retirement contributions and amounts necessary to repay a pension loan are not included in projected disposable income suggests that pension contributions and pension loan repayment amounts are excluded from the calculation of plan payments at confirmation. If those amounts are not to be included as plan payments, then the argument can be made that they need not be considered as “regular income” for eligibility purposes because they would not be necessary to fund a plan.9 On the other hand, the exclusion of pension and retirement contributions from property of the estate and from disposable income arguably tells us nothing about whether benefits from a pension or retirement plan are “income” for purposes of the eligibility requirement that the debtor have regular and stable income to fund a plan. Once again, the Bankruptcy Code nowhere states that “regular income” for eligibility purposes must be property of the estate or available to satisfy the projected disposable income test at confirmation.10
BAPCPA creates the possibility that contributions to a pension or retirement plan and amounts required to repay a pension loan would be included in “income” for purposes of eligibility but would then be excluded from the calculation of projected disposable income at confirmation under § 1325(b).
Note also that the retirement contributions excluded from property of the estate and from projected disposable income at confirmation by § 541(c)(7) and the loan repayments excluded from projected disposable income by §§ 1322(f) and 362(b)(19) are limited to specified IRS-qualified plans and annuities. Even if there is something in § 541(c)(7) or § 1322(f) that inspires courts to distort the content of regular income for eligibility purposes, this reasoning sheds no light on the status of retirement benefits from sources not specifically qualified by the IRS. The better logic is that retirement benefits are income for eligibility purposes without regard to whether those benefits result from contributions that are excluded from or included in property of the estate or projected disposable income.11
The legislative intent to permit access to Chapter 13 for pensioners has been oddly distorted by one court of appeals. The United States Court of Appeals for the Fourth Circuit held that a pension fund qualified under ERISA is a “spendthrift trust” that would not be subject to claims of creditors, and thus the benefits payable from that pension fund do not constitute regular income for Chapter 13 purposes.12 Though a debtor’s beneficial interest in a spendthrift trust is excluded from property of the estate by § 541(c)(2), nowhere does the Bankruptcy Code require that income be property of the estate to satisfy the eligibility requirements in a Chapter 13 case.13 That the pension fund may constitute a spendthrift trust enhances its reliability as a source of regular income though the benefits themselves and the corpus of the trust do not become property of the Chapter 13 estate. The spendthrift quality of a debtor’s pension benefits means that creditors would have no expectation or entitlement to those benefits under nonbankruptcy law. In a Chapter 13 case, the debtor voluntarily submits that income to the trustee and agrees to commit at least the portion that is “disposable”14 to make payments to creditors under a plan. Pension benefits are income available to fund a voluntary Chapter 13 plan, notwithstanding that creditors could not execute on that income in any other context.
The regular income requirement should also not be confused with the question whether an income deduction order can be sent to the pension fund to require payment of the debtor’s benefits directly to the Chapter 13 trustee. 11 U.S.C. § 1325(c) states that after confirmation “the court may order any entity from whom the debtor receives income to pay all or any part of such income to the trustee.” In many jurisdictions, income deduction orders are required in all Chapter 13 cases, and in some jurisdictions such orders are issued even before confirmation.15
There is some confusion in the case law whether an income deduction order under § 1325(c) can be enforced against an income source that has special protection under state or federal law. It has been held that an ERISA-qualified pension fund is not subject to income deduction orders in a Chapter 13 case.16 However, the Bankruptcy Code does not require that a source of regular income must also be an entity subject to an income deduction order. Though many courts have concluded that the feasibility of Chapter 13 plans is dramatically enhanced when the plan is funded by an income deduction order, it does not follow that eligibility depends on the enforceability of such an order.17
The courts have struggled to determine whether a debtor has regular income from a pension plan when the debtor’s right to benefits is unmatured or conditioned, for example, upon the payment of penalties for withdrawals before a certain age. Most of the decisions on this subject are projected disposable income test cases under § 1325(b).18
For example, in In re Solomon,19 the United States Court of Appeals for the Fourth Circuit held that a Chapter 13 debtor under the age of 701/2 was not required to include an “income expectation” from individual retirement accounts in projected disposable income for purposes of § 1325(b)(1)(B). At confirmation, the debtor in Solomon was not receiving disbursements from his IRAs and expressed no intention to withdraw funds from the IRAs during the life of the plan. The Fourth Circuit concluded that projected disposable income did not include “speculative” amounts that the debtor could draw but was electing not to receive from the IRAs. The same logic would exclude potential income from the IRAs from regular income for eligibility purposes.20
On the other hand, voluntary withdrawals from an IRA to fund a Chapter 13 plan certainly smell like regular income for eligibility purposes if the debtor’s withdrawal rights are sufficient to produce a stable flow of cash. For example, in In re Lapin,21 the debtor proposed to fund the plan in part from salary and in part from voluntary withdrawals from a large IRA that was otherwise beyond the reach of creditors.22 The bankruptcy court held that “retirement funds are ‘income’ that qualify an individual for chapter 13 relief . . . . [T]he receipt of individual retirement account proceeds, combined with the Debtor’s employment income, will be sufficient to fund substantial portions of the chapter 13 plan.”23
A debtor with an entitlement to income from a pension plan who needs that regular income to be eligible for Chapter 13 relief may have to make formal demand for payments from the pension fiduciary and suffer whatever contractual or statutory penalties apply. The developing rule seems to be that the debtor controls this issue: If the debtor is not already receiving distributions from the pension plan, the debtor cannot be forced to demand payments or loans for eligibility purposes or to satisfy the projected disposable income test at confirmation.24 If the debtor is actually receiving pension income at the petition, or if the debtor volunteers to make withdrawals during the case, that money will be included in regular income for purposes of § 109(e) and will be included in current monthly income for purposes of projected disposable income at confirmation under § 1325(b).25
That a debtor could realize income by making demand or accelerating the payment of benefits from a pension plan becomes an eligibility issue in many more Chapter 13 cases if income includes a debtor’s capacity to earn more money in the future. In In re Jobe,26 the bankruptcy court held that “the capacity of the debtor to earn more money and, thereby, pay more in plan payments” is an element of the projected disposable income test in § 1325(b). In Jobe, the court found that the debtor had marketable skills and was physically able to earn more money by getting a job. The debtor’s choice to earn less was rejected in favor of the debtor’s ability to earn more, with the result that the plan failed the disposable income test calculation. Applying the same logic to the debtor in Solomon would require that the debtor demand payment from the pension plan and use that income to fund payments to creditors. Similarly, regular income for eligibility purposes would include all funds that a debtor could demand from a pension or profit-sharing plan without regard to whether benefits were currently being paid to the debtor. Forcing the debtor to make demand on a pension plan for payments into a Chapter 13 plan is an issue more likely faced at confirmation than at eligibility.27 But the debtor who uses an expectancy of this sort as income for eligibility purposes can anticipate that the same income will be treated as projected disposable income at confirmation.
1 See H.R. Rep. No. 95-595, at 311–12 (1977) (“[I]ndividuals on . . . fixed pension incomes . . . will be able to work out repayment plans.”).
2 Regan v. Ross, 691 F.2d 81 (2d Cir. Oct. 6, 1982) (Oakes, Meskill, Kearse) (State pension benefits are regular income.); In re Lapin, 302 B.R. 184, 189 (Bankr. S.D. Tex. Sept. 3, 2003) (Steen) (Withdrawals from IRA to partially fund plan are regular income. “The statutory change to ‘individuals with regular income’ was intended to expand eligibility and that change was intended to allow individuals on social security, fixed pension incomes, and investment incomes to qualify. . . . [R]etirement funds are ‘income’ that qualify an individual for chapter 13 relief . . . . [T]he receipt of individual retirement account proceeds, combined with the Debtor’s employment income, will be sufficient to fund substantial portions of the chapter 13 plan.”); In re Vega, 163 B.R. 489 (Bankr. W.D. Tex. Jan. 24, 1994) (Leif Clark) (Benefits payable to a Chapter 13 debtor from an ERISA-qualified public retirement system are “income” for purposes of funding the Chapter 13 plan. However, such pension benefits are beyond the reach of an income deduction order under § 1325(c).); In re Wood, 23 B.R. 552 (Bankr. E.D. Tenn. Sept. 15, 1982) (Kelley) (ERISA-qualified pension plan benefits are regular income.). See also In re Schnabel, 153 B.R. 809 (Bankr. N.D. Ill. Apr. 23, 1993) (Katz) (Pension benefits are included in projected disposable income for purposes of the confirmation test in § 1325(b).). See § 91.2 Projected (Disposable) Income, § 99.4 Pension Loan Repayments and § 99.5 Employee Benefit Plan Contributions for discussion of pension benefits as projected disposable income at confirmation.
3 Pub. L. No. 109-8, 119 Stat. 23 (2005).
5 See 11 U.S.C. § 541(b)(7), discussed in § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA and § 99.5 Employee Benefit Plan Contributions.
7 The deduction from projected disposable income of ongoing contributions to a qualified retirement plan is controversial. See § 91.3 Reasonably Necessary for Maintenance or Support, § 93.1 Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income and § 99.5 Employee Benefit Plan Contributions.
8 There is controversy whether ongoing contributions to a retirement plan are excluded from projected disposable income. See § 91.3 Reasonably Necessary for Maintenance or Support and § 99.5 Employee Benefit Plan Contributions.
9 The logic of reasoning backward from “disposable income” at confirmation to “regular income” for eligibility is questionable. See § 11.1 What Is Regular Income?.
10 See § 11.1 What Is Regular Income?.
11 See also § 11.1 What Is Regular Income?.
12 McLean v. Central States, Se. & Sw. Areas Health & Welfare Pension Fund (In re McLean), 762 F.2d 1204 (4th Cir. May 24, 1985) (Phillips, Wilkinson, Kiser). See Chrysler-UAW Pension Plan v. Watkins (In re Watkins), 95 B.R. 483 (W.D. Mich. July 1, 1988) (Enslen) (Pension plan was enforceable spendthrift trust. Debtor’s interest was excluded from property of the Chapter 13 estate, and the bankruptcy court could not direct the pension plan to pay a portion of the debtor’s monthly pension benefits to the trustee.). See also Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (June 15, 1992) (ERISA is applicable nonbankruptcy law for purposes of § 542(c)(2).).
13 See § 11.1 What Is Regular Income?.
15 See § 125.1 Order to Debtor’s Employer, § 125.2 Can Employer Charge a Fee?, § 125.3 Direct-Pay Orders, § 125.4 Changing Employers or Source of Income, § 125.5 Modification and Suspension of Income Deduction Orders, § 125.6 Failure to Deduct or Remit and § 125.7 Special Deduction Order Problems: Entitlements, Pensions and Government Employers.
16 McLean v. Central States, Se. & Sw. Areas Health & Welfare Pension Fund (In re McLean), 762 F.2d 1204 (4th Cir. May 24, 1985) (Phillips, Wilkinson, Kiser); In re Vega, 163 B.R. 489, 491–92 (Bankr. W.D. Tex. Jan. 24, 1994) (Leif Clark) (In the context of an objection by a retirement system to an income deduction order under § 1325(c), benefits payable to a Chapter 13 debtor from an ERISA-qualified public retirement system are income for purposes of funding the Chapter 13 plan but are not property of the Chapter 13 estate under § 1306 and cannot be the subject of an income deduction order under § 1325(c). “[T]he only interpretation of Section 1325(c) that saves it from invalidity (for conferring a power beyond the subject matter of the courts to exercise in the first place) is one that limits its reach to the scope of property of the estate as found in Section 1306. The [Public School Retirement System] cannot be compelled to honor a pay order if the res in question lies outside the subject matter jurisdiction of this court. Of course, once the funds are paid over to the debtor, they become (at least conceivably) property of the estate, so it is legitimate for the trustee to consider the income realized by the debtor from this fund when she considers whether to recommend confirmation of the debtor’s plan. And similarly, the debtor is free to use these funds to fund her plan upon her receipt of them.”); Chrysler-UAW Pension Plan v. Watkins (In re Watkins), 95 B.R. 483 (W.D. Mich. July 1, 1988) (Enslen).
17 This same mistake—confusing an eligibility requirement with some other test for confirmation—underlies the problem with Social Security benefits discussed in § 12.5 Social Security.
19 67 F.3d 1128 (4th Cir. Oct. 23, 1995) (Widener, Wilkinson, Michael).
20 See also In re Smith, 222 B.R. 846, 858–61 (Bankr. N.D. Ind. May 29, 1998) (Dees) (Projected disposable income excludes distributions under an ERISA-qualified pension and profit-sharing plan that the debtor elects to reinvest rather than receive in cash. “The Trustee argues that this court should require Mrs. Smith to take future benefits under the Profit Sharing Plan in the form of a cash distribution . . . . The court, however, finds that the protections of ERISA preclude the relief which the Trustee seeks. . . . [A] court cannot force a debtor to withdraw or borrow pension or retirement monies to fund a . . . Chapter 13 plan.”); In re Short, 176 B.R. 886 (Bankr. S.D. Ind. Jan. 19, 1995) (Lessen) (33-year-old debtor with $17,000 in an exempt pension plan is not required by the disposable income test to withdraw funds and suffer statutory penalties.). See § 48.3 Exemptions and Exemption Limitations Added by BAPCPA for discussion of 11 U.S.C. §§ 522(b)(3)(B) and 522(d)(12), which exempt “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under [specific sections] of the Internal Revenue Code of 1986.”
21 302 B.R. 184 (Bankr. S.D. Tex. Sept. 3, 2003) (Steen).
22 See § 11.1 What Is Regular Income? for discussion of exempt income as regular income.
23 In re Lapin, 302 B.R. at 189.
24 See § 91.2 Projected (Disposable) Income. See also § 87.6 Pension Loan Repayment: § 1322(f) after BAPCPA for discussion of 11 U.S.C. § 1322(f), which prohibits a plan from modifying the terms of pension loan repayment in cases filed after October 17, 2005.
25 See § 92.3 Current Monthly Income: The Baseline. See also § 99.4 Pension Loan Repayments and § 99.5 Employee Benefit Plan Contributions for discussion of the deductions from disposable income for pension contributions and amounts required to repay a pension loan.
26 197 B.R. 823 (Bankr. W.D. Tex. May 28, 1996) (Monroe).