Cite as: Keith M. Lundin, Lundin On Chapter 13, § 99.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
For all Chapter 13 debtors—without regard to whether the debtor’s current monthly income (CMI) is greater than or less than applicable median family income—there are two deductions from CMI necessary to determine “disposable income” that are not found in or referenced in § 1325(b). One of these errant deductions is in § 1322(f):1
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 1325.2
BAPCPA contained many new protections for pension and retirement plans and contributions.3 To understand the exclusion of pension loans from disposable income in § 1322(f), it is necessary to review the cross-referenced exception to the automatic stay in § 362(b)(19),
(19) under subsection (a), of withholding of income from a debtor’s wages and collection of amounts withheld, under the debtor’s agreement authorizing that withholding and collection for the benefit of a pension, profit-sharing, stock bonus, or other plan established under section 401, 403, 408, 408A, 414, 457, or 501(c) of the Internal Revenue Code of 1986, that is sponsored by the employer of the debtor, or an affiliate, successor, or predecessor of such employer—
(A) to the extent that the amounts withheld and collected are used solely for payments relating to a loan from a plan under section 408(b)(1) of the Employee Retirement Income Security Act of 1974 or is subject to section 72(p) of the Internal Revenue Code of 1986; or
(B) a loan from a thrift savings plan permitted under subchapter III of chapter 84 of title 5, that satisfies the requirements of section 8433(g) of such title;
but nothing in this paragraph may be construed to provide that any loan made under a governmental plan under section 414(d), or a contract or account under section 403(b), of the Internal Revenue Code of 1986 constitutes a claim or a debt under this title[.]4
It is a little awkward to translate an exception to the automatic stay into an amount that is deductible from CMI to determine disposable income, but the cross-reference to § 362(b)(19) in § 1322(f) requires exactly that. Drawing from the exception to the automatic stay in § 362(b)(19), the characteristics of the amounts required to repay a loan that are excluded from disposable income are:
There must be “withholding” of income from the debtor’s wages and “collection of amounts withheld.”
There must be an “agreement” authorizing that withholding and collecting.
The authorized withholding and collection must be “for the benefit” of a pension, profit-sharing, stock bonus or other plan established under the requisite sections of the Internal Revenue Code.
The pension, profit-sharing, stock bonus or other plan must be “sponsored by the employer of the debtor, or an affiliate, successor, or predecessor of such employer.”
Amounts withheld and collected must be used “solely for payments relating to a loan from a plan” under § 408(b)(1) of ERISA or § 72(p) of the Internal Revenue Code or a loan from a thrift savings plan under subchapter III of Chapter 84 of Title 5.
Any amount “required to repay” a loan with the above characteristics is excluded from “disposable income” by § 1322(f). At risk of oversimplification, this exclusion from disposable income applies only to amounts voluntarily withheld from a debtor’s wages pursuant to an agreement to the extent the amounts withheld are used solely for repayment of a loan from a pension, profit-sharing, stock bonus or other plan that meets the precise tax characteristics reproduced above. This exclusion of pension loan repayment from disposable income by BAPCPA overrules a substantial body of pre-BAPCPA case law interpreting the “reasonable and necessary” expense test in § 1325(b) of former law to preclude pension loan repayment.5
The odd placement and wording of this exclusion from disposable income raises questions. Section 1322(f) states that the plan “may not materially alter the terms of a loan described in section 362(b)(19).” Imagine a Chapter 13 debtor with a pension loan that meets all of the criteria in § 362(b)(19). The loan balance is $2,000 and the debtor’s agreement calls for withholding from wages of $100 per month. What amount is deducted from CMI to determine disposable income?
There are several possible answers to that question. It could be that the $100 per month withheld from the debtor’s wages is the amount that does not constitute disposable income. By that interpretation, CMI would be reduced by $100. That interpretation allows the debtor a $100 reduction in CMI for every month of the applicable commitment period,6 without regard to whether the applicable commitment period is longer or shorter than the time it will take the debtor to repay the pension loan at the agreed upon rate.7 This is not a troubling outcome if you (properly) conceive of the new disposable income test as a mathematical calculation detached from the reality of the debtor’s financial circumstances. If that view is too discomforting, other possible interpretations of the pension loan deduction are possible.
For example, the $2,000 amount necessary to repay the pension loan might be divided by the “applicable commitment period” and that amount then subtracted from CMI on the way to disposable income. There is nothing in the statute to require this interpretation, and elsewhere the drafters demonstrated the capacity to divide by a number of months when that was intended.8
If the applicable commitment period turns out to be 60 months, then the allowable reduction in CMI for the pension loan in the example would be $33.33, not $100. This interpretation, of course, bears no relationship to the mandate that the plan cannot materially alter the terms of the loan. In the example, the loan must be repaid at the rate of $100 per month, not $33.33. This will not be discomforting to those who conceive of the disposable income test as a mathematical calculation with no relationship to the plan or the debtor’s financial circumstances. Those who conceive of the disposable income test as a budgeting process will be offended by the disconnect between this calculation and the actual amount the debtor will have to pay to confirm a plan.
The forms drafters punted on this issue. At Line 55 of Official Form B22C, the instructions state “enter the monthly average of . . . all payments of loans from retirement plans, as specified in § 362(b)(19).”9 To calculate a “monthly average,” the debtor has to know how many months to divide into “all repayments” of pension loans. There is no reference to commitment period at Line 55 and no reference to contract repayment terms. Which is the divisor? The only debtors who should be filling out Line 55 of Official Form B22C will be Chapter 13 debtors with CMI greater than applicable median family income. All such debtors will have an applicable commitment period of 60 months.10 But Chapter 13 plans cannot materially alter the agreed-upon withholding amount or term.
If the proper deduction from CMI is $100 in the above example, then the resulting disposable income that will be multiplied by the applicable commitment period to determine the entitlement of unsecured creditors will be reduced by $100. If $33.33 is the correct adjustment in CMI to reflect the $2,000 pension loan repayment, then CMI is reduced by only $33.33 and that higher number is multiplied by the applicable commitment period to determine the entitlement of unsecured creditors under § 1325(b). The difference of $66.67 when multiplied by the required 60-month commitment period for a Chapter 13 debtor with CMI greater than applicable median family income is $4,000 that must be paid to unsecured creditors to satisfy the disposable income test. Elsewhere, BAPCPA was more helpful with respect to accounting for expenses and allowances that are reductions in CMI to determine disposable income.11
This entire accounting issue could have been avoided by the forms drafters. The statute excludes “amounts required to repay” pension loans from disposable income. No “monthly average” need be calculated (or invented) if the total amount required to repay the pension loan is subtracted from “disposable income”—after CMI is multiplied by commitment period to produce disposable income.12 This option would be true to the statute but inconsistent with the construction of Official Form B22C.
The exclusion of pension loan repayments from disposable income creates some dilemmas for debtors’ counsel. At least with respect to “assisted persons,” a debtor’s attorney is forbidden by § 526(a)(4) to “advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title.”13 Given that repayment of a pension or profit-sharing loan is the debtor repaying the debtor, it may well be in the best interests of the debtor to initiate a pension loan before filing a Chapter 13 case on terms that will satisfy the exclusion from disposable income in § 1322(f) and § 362(b)(19). If initiating a pension loan is incurring more debt for purposes of § 526(a)(4), then a debtor’s counsel is at risk to give that advice. On the other hand, § 362(b)(19) is explicit that “nothing in this paragraph may be construed to provide that any loan” made under the specified sections “constitutes a claim or a debt under this title.”14 If a pension loan is not a debt, then advising the debtor to incur a pension loan before filing the Chapter 13 case would not run afoul of § 526(a)(4).
If the debtor already has a qualifying pension loan but has interrupted the withholding of contributions, then counsel is on less risky ground to advise the debtor to allow the withholding of wages to recommence. This might be a good idea because it is arguable that the exclusion from disposable income in § 1322(f) only applies to withholding of income from the debtor’s wages as described in § 362(b)(19). A pension loan that is not being repaid through withholding from wages at the petition may draw challenge under the disposable income test.
1 The other is found in 11 U.S.C. § 541(b)(7) and is discussed in § 492.1 [ Employee Benefit Plan Contributions ] § 99.5 Employee Benefit Plan Contributions.
2 11 U.S.C. § 1322(f).
3 See, e.g., the new exemption provisions with respect to retirement funds in 11 U.S.C. § 522(b)(4), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
4 11 U.S.C. § 362(b)(19), discussed further in § 58.10 Pension Loans Exception after BAPCPA.
5 See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3 Reasonably Necessary for Maintenance or Support. See also Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995) (Loan repayments to ERISA-qualified profit-sharing account are not reasonably necessary for the debtor’s maintenance or support under § 1325(b).).
6 See 11 U.S.C. § 1325(b)(4), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1 Applicable Commitment Period Calculation.
7 Applicable commitment period under 11 U.S.C. § 1325(b)(4) is discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1 Applicable Commitment Period Calculation.
8 See, e.g., 11 U.S.C. § 707(b)(2)(A)(iii) (division of secured debts by 60).
9 Line 55 of Official Form B22C, discussed in § 380.1 [ Form B22C: Disposable Income Calculation ] § 36.21 Form 122C-2: Disposable Income Calculation.
10 See 11 U.S.C. § 1325(b)(4), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1 Applicable Commitment Period Calculation.
11 See, e.g., 11 U.S.C. § 707(b)(2)(A)(iii), discussed in § 485.1 [ Average Monthly Payments on Account of Secured Debts ] § 96.1 Average Monthly Payments on Account of Secured Debts, which specifies division by 60 to determine average monthly payments on account of secured debts for a Chapter 13 debtor with CMI greater than applicable median family income as part of the determination of “amounts reasonably necessary to be expended—” within the disposable income test.
13 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.
14 11 U.S.C. § 362(b)(19), discussed in § 58.10 Pension Loans Exception after BAPCPA.