§ 58.10 — Pension Loans Exception after BAPCPA
Revised: July 14, 2007
BAPCPA enhanced the status of pension loans in Chapter 13 cases. At confirmation, new subsection (f) to § 1322 declares that a Chapter 13 plan may not “materially alter” the terms of a pension loan and any amount required to repay such a loan does not constitute disposable income for purposes of § 1325.1 There is also this new exception to the automatic stay in § 362(b)(19):
(b) The filing of a petition . . . does not operate as a stay—
. . . .
(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.2
There are at least five discrete statutory conditions for this new exception to the automatic stay for pension loan repayment.
The exception only applies to withholding of income from a debtor’s wages and collection of amounts withheld.
There must be an agreement authorizing the withholding and collection of income from the debtor’s wages.
The withholding and collection must be for the benefit of a pension, profit-sharing, stock bonus or other plan established under § 401, 403, 408, 408A, 414, 457 or 501(c) of the Internal Revenue Code.
The plan must be sponsored by the debtor’s employer or by an affiliate, successor, or predecessor of the employer.
The exception applies only to the extent amounts withheld and collected are 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.
Without drilling too deeply, new § 362(b)(19) insulates from the automatic stay most wage withholding to repay pension loans you are likely to encounter in Chapter 13 practice. The cross-referenced sections of the Internal Revenue Code define the common forms of pension and profit-sharing plans, including individual retirement accounts that are sponsored by an employer. Section 408(b)(1) of ERISA is the generic statutory authorization for qualified pension plans to make loans without violating fiduciary duties.
Perhaps the key conditions here are that the debtor must have an agreement authorizing the withholding of wages to repay a pension loan. New § 362(b)(19) is not perfectly clear but could be interpreted to require that the agreement and withholding preexist the petition. If there is no agreement and withholding at the petition, it is not certain that the debtor can enter into an agreement and authorize withholding after the petition. Those actions would be a use of estate property in a Chapter 13 case that would be subject to notice and a hearing and debtors can expect an objection from the Chapter 13 trustee, if not from creditors.
If the debtor comes into the Chapter 13 case with a pension loan agreement and with wage withholding in place, new § 362(b)(19) clearly allows that arrangement to continue without interruption by the stay.
This is more than a little bit remarkable. Of course, a loan from a pension or profit- sharing plan is a loan of the debtor’s money to the debtor. Withholding of wages to repay a pension loan is the debtor repaying the debtor. New § 362(b)(19) stops the automatic stay from stopping the debtor from continuing to prefer repayment of the debtor by the debtor. Other provisions of BAPCPA further protect this largesse: the terms of repayment cannot be materially altered by confirmation3 and the amounts necessary to repay the loan are not disposable income at confirmation.4
This is a great deal for Chapter 13 debtors who have ERISA-qualified pension or profit-sharing plans. There may be professional risks here with respect to advising such a debtor before filing a Chapter 13 case. It could be substantially in the debtor’s best interest to initiate a pension or profit-sharing loan and enter into an agreement for withholding of wages to repay that loan consistent with new § 362(b)(19) before filing a Chapter 13 case. Detailed elsewhere, advising a consumer debtor to incur debt in contemplation of bankruptcy is a controversial new prohibition in § 526(a)(4) if the person giving the advice is a Debt Relief Agency.5 There will be some cases in which the debtor needs the income that is being withheld to repay a pension loan for other debt repayment through the Chapter 13 plan. But for the most part, § 362(b)(19) will “force” Chapter 13 debtors to repay themselves their own prepetition pension loans.
It is interesting that § 362(b)(19)(B) states “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.”6 There is controversy whether pension loans are “true debts” for bankruptcy purposes.7 The quoted provision is obviously intended to allow debtors to repay pension loans without declaring pension loans to be debts for other bankruptcy purposes. This provision will be raised as a defense when a Debt Relief Agency gets caught advising an assisted person or prospective assisted person to borrow money from a pension plan in contemplation of bankruptcy. If that borrowing is not a “debt,” then perhaps the prohibition on counseling a prospective debtor to incur debt would not apply under § 526.
1 11 U.S.C. § 1322(f), discussed in § 491.1 [ Pension Loan Repayments ] § 99.4 Pension Loan Repayments.
2 11 U.S.C. § 362(b)(19).
3 11 U.S.C. § 1322(f), discussed in § 491.1 [ Pension Loan Repayments ] § 99.4 Pension Loan Repayments.
4 11 U.S.C. § 1322(f), discussed in § 491.1 [ Pension Loan Repayments ] § 99.4 Pension Loan Repayments.
5 See 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.
6 11 U.S.C. § 362(b)(19)(B).
7 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.