§ 87.6     Pension Loan Repayment: § 1322(f) after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 87.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Classification issues may arise because of new subsection (f) BAPCPA added to § 1322:

A plan may not materially alter the terms of a loan described in section 362(b)(19) and any amounts required to repay such loan shall not constitute “disposable income” under section 1325.1
[2]

Under new § 1322(f), a Chapter 13 plan may not “materially alter” the terms of a loan described in § 362(b)(19). The awkward cross-reference captures a new exception to the automatic stay for consensual withholding of income from a debtor’s wages for the benefit of a pension, profit-sharing or stock bonus plan when amounts withheld are “used solely for payments relating to a loan.”2

[3]

House Report No. 109-31 recites that the intent of new § 1322(f) is “to expand the protection for tax-favored retirement plans or arrangements that may not be already protected under Bankruptcy Code section 541(c)(2) pursuant to Patterson v. Shumate, [504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992)].”3 The withholding excepted from the automatic stay by new § 362(b)(19) is withholding from a debtor’s wages pursuant to an agreement for the benefit of a pension, profit-sharing, stock bonus or other employer-sponsored plan established under Internal Revenue Code § 401, 403, 408, 408(a), 414, 457 or 501(c), to the extent that the withheld amounts are “used solely to repay a loan . . . as authorized by § 408(b)(1) of [ERISA] or subject to Internal Revenue Code § 72(p) or with respect to a loan with certain thrift savings plans.”4

[4]

Depending on the terms of a particular pension or profit-sharing plan, the pension loans described in new § 362(b)(19) may be unsecured loans. Although § 362(b)(19) carefully provides that the new section should not be construed to provide that a pension loan “constitutes a claim or a debt” for bankruptcy purposes,5 pension loans are likely to be characterized as unsecured claims in Chapter 13 cases.

[5]

BAPCPA enacted new § 1322(f) without amendment to or cross-reference to § 1322(b). Section 1322(b)(1) imposes the unfair discrimination standard on classifications of unsecured claims in Chapter 13 cases.6 The absence of a cross-reference to new § 1322(f) in § 1322(b) leaves open whether the unfair discrimination standard applies to a pension loan that is separately classified and not “materially altered” by a Chapter 13 plan.

[6]

The first sentence of § 1322(b) provides that the permissive power to separately classify and the unfair discrimination standard in § 1322(b)(1) are “subject to subsections (a) and (c) of this section.”7 There is no similar cross-reference or mention of new subsection (f). BAPCPA mandates that a Chapter 13 plan cannot materially alter the terms of a pension loan—which will require the plan to separately classify the pension loan—but BAPCPA did not also amend the Code to signal that separate classification of pension loans is an exception to the unfair discrimination test in § 1322(b)(1).

[7]

Pension loans described in new § 362(b)(19) are nondischargeable under § 523(a)(18) in a Chapter 7 or individual Chapter 11 case. There is no exception to discharge for pension loans in a Chapter 13 case at the completion of payments under § 1328(a). This is a strange picture: Chapter 13 debtors are compelled by § 1322(f) to continue the contract terms of a pension loan described in § 362(b)(19); there is no automatic stay with respect to continued withholding of income to repay a pension loan; any plan provision for continued payment of a pension loan may collide with the unfair discrimination test in § 1322(b)(1); but pension loans (to the extent they are “debts”) are not excepted from discharge at the completion of payments in a Chapter 13 case.

[8]

It is conceivable that bankruptcy courts will refuse to confirm a Chapter 13 plan that favors a pension loan described in § 362(b)(19) when other unsecured claims are paid less through the plan. Keep in mind that loans from a pension or profit-sharing plan described in § 362(b)(19) are basically loans by the debtor to the debtor. BAPCPA may have intended to favor repayment of pension and profit-sharing loans, but the legislative effort may have overlooked the fairness considerations in § 1322(b)(1).

[9]

Because pension and profit-sharing loans described in § 362(b)(19) are dischargeable at the completion of payments in Chapter 13 cases, the new permissive power in § 1322(b)(10) to pay postpetition interest is not applicable.8 The omission of new § 523(a)(18) from the debts that are nondischargeable in a Chapter 13 case under § 1328(a) could raise an inference that BAPCPA did not contemplate payment of postpetition interest on a pension or a profit-sharing loan claim. This inference then runs squarely into the prohibition on material alteration of repayment terms. When the contract terms include payment of interest, the prohibition against material alteration in new § 1322(f) will compel a Chapter 13 debtor to propose payment of postpetition interest with respect to a pension or profit-sharing loan described in § 362(b)(19). This favorable classification is likely to draw an unfair discrimination objection from unsecured claim holders not receiving postpetition interest through the plan.

[10]

Debtors’ counsel are wondering whether to advise a Chapter 13 debtor, before filing the petition, to contract for any available pension or profit-sharing loan or, at least, to engage the wage withholding process with respect to a preexisting pension or profit-sharing loan to maximize the probability that §§ 362(b)(19) and 1322(f) will apply. Incurring a pension loan or commencing a wage deduction to repay a pension loan may make financial sense for the debtor, but advice to do so could collide with one of the new restrictions on Debt Relief Agencies.

[11]

Detailed elsewhere,9 § 526(a)(4), as enacted by BAPCPA, prohibits a Debt Relief Agency from advising an assisted person (or prospective assisted person) “to incur more debt in contemplation of . . . filing a case under this title.”10 If the debtor is an assisted person—that is, an individual with primarily consumer debt and less than $150,000 of nonexempt assets11—debtor’s counsel is probably a Debt Relief Agency and the restriction in § 526(a)(4) could be in play with respect to a pension or profit-sharing loan.

[12]

Engaging a wage deduction for a preexisting pension loan does not implicate incurring more debt. Contracting for a new pension loan could. A new pension loan tees up the question whether a pension or profit-sharing loan described in § 362(b)(19) is a “debt” for purposes of § 526(a)(4). In other contexts, some courts have concluded that pension and profit-sharing “loans” are not true debts because typically, the wage earner cannot be compelled to repay the “loan”—only the benefits available to the borrower are reduced by loan balances that are not repaid.12 New § 362(b)(19) specifically provides that “nothing in this paragraph may be construed to provide that any [pension or profit-sharing loan] . . . constitutes a claim or a debt under this title.”13 This language from the same enactment that includes new § 526(a)(4) supports the argument that even a Debt Relief Agency can advise an assisted person to initiate a pension or profit-sharing “loan” or commence wage withholding to repay a pension loan before filing a Chapter 13 petition.

[13]

There are several technical questions about the separate classification likely to result from new § 1322(f). A Chapter 13 plan may not materially alter the terms of a loan “described in section 362(b)(19).”14 “Materially alter” is not further defined by BAPCPA. The adjective “materially” certainly suggests that some alterations of the terms of a pension or profit-sharing loan are permitted by § 1322(f) while others are not. This could become significant when an unfair discrimination challenge is raised to the separate classification of a pension or profit-sharing loan for more favorable treatment through a Chapter 13 plan. Debtor’s counsel should first consider whether nonmaterial alterations are possible that would align repayment of the pension or profit-sharing loan with payments to other unsecured claim holders to produce a plan that more fairly discriminates, if at all, in favor of the pension loan.

[14]

The loan described in § 362(b)(19) includes the debtor’s agreement authorizing the withholding and collection of payments for the benefit of a pension, profit-sharing, stock bonus or other plan. Is it prerequisite to come within the terms of a loan described in § 362(b)(19) that the debtor’s wages are subject to withholding at the time of the Chapter 13 petition? In other words, if the debtor received a loan from a pension or profit-sharing plan but withholding of wages to repay that loan is not in effect at the petition, can the debtor materially alter that loan notwithstanding § 1322(f)? Chapter 13 debtors will want to separately classify the pension loan for repayment consistent with the contract terms without regard to whether withholding of wages is in effect at the petition. Section 362(b)(19) does not resolve whether withholding at the petition is a necessary condition for the prohibition on material alteration in § 1322(f).

[15]

Under new § 1322(f), any amounts required to repay a pension or profit-sharing loan described in § 362(b)(19) “shall not constitute ‘disposable income’ under section 1325.”15 This provision may shed further light on the question whether the unfair discrimination standard in § 1322(b)(1) will interfere with the prohibition against material alteration in new § 1322(f). The income necessary to not materially alter the repayment terms of a pension or profit-sharing loan is excluded by § 1322(f) from the disposable income calculation at confirmation in § 1325(b).

[16]

This new exclusion indicates that Congress intended Chapter 13 debtors to be able to repay pension and profit-sharing loans without interference from the disposable income test at confirmation. This will suggest to some that new § 1322(f) should also be read as a statutory exception to the unfair discrimination standard for classification of claims in Chapter 13 cases. It will suggest to others that Congress knew exactly how to specify the confirmation standards that would apply to repayment of pension and profit-sharing loans, and the failure to take exception to § 1322(b)(1) leaves the unfair discrimination standard as a barrier to separate classification of pension loans.

[17]

In this regard, BAPCPA prefaced the new power in § 1322(a)(4) to pay less than all of a claim entitled to priority under § 507(a)(1)(B) with the phrase “notwithstanding any other provision of this section”—signaling that this new power is not subject to other tests in § 1322 such as the unfair discrimination standard for classification of claims in § 1322(b)(1).16 There is no similar “notwithstanding” in new § 1322(f). It is also at least interesting that the prohibition against material alteration of pension loans was not added to the mandatory plan provisions in § 1322(a) or to the permissive plan provisions in § 1322(b) but was separately enacted by BAPCPA in a new subsection of its own. These structural and technical confusions make it impossible to tell from the statute whether separate classification of pension and profit-sharing loans is insulated from the unfair discrimination standard in Chapter 13 cases.


 

1  11 U.S.C. § 1322(f).

 

2  11 U.S.C. § 362(b)(19), discussed in § 433.1 [ When Does § 362(c)(4) Apply? ] § 61.1  When Does § 362(c)(4) Apply?.

 

3  H.R. Rep. No. 109-31, at 77 (2005) (discussing § 224 of S. 256).

 

4  H.R. Rep. No. 109-31, at 78.

 

5  See 11 U.S.C. § 362(b)(19).

 

6  See 11 U.S.C. § 1322(b)(1), discussed in § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

7  11 U.S.C. § 1322(b).

 

8  See 11 U.S.C. § 1322(b)(10), discussed in § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

9  See § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency.

 

10  11 U.S.C. § 526(a)(4), discussed in §§ 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency and 491.1 [ Pension Loan Repayments ] § 99.4  Pension Loan Repayments. Discussed in § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency, the prohibition in 11 U.S.C. § 526(a)(4) has been declared unconstitutional by several courts.

 

11  See 11 U.S.C. § 101(3), discussed in § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency.

 

12  See §§ 164.1 [ Projected (Disposable) Income ] § 91.2  Projected (Disposable) Income and 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

13  11 U.S.C. § 362(b)(19).

 

14  11 U.S.C. § 1322(f).

 

15  11 U.S.C. § 1322(f). See § 491.1 [ Pension Loan Repayments ] § 99.4  Pension Loan Repayments.

 

16  See 11 U.S.C. § 1322(a)(4), discussed in § 458.1 [ Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) ] § 88.5  Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA.