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Are Pension Loans Unsecured debts?

This is not the most fundamental issue in bankruptcy, but one of our local trustees continuously insists that pension loans that are being repaid by wage deductions should be listed on the second page of the Statistical Summary as a debt. I have not done so, but a recent discussion among my bankruptcy debtor colleagues has motivated me to research the issue.

The Statistical Summary requires a debtor to list various non-dischargable debts, such as priority taxes, student loans, and support obligations. The purpose, I guess, is to compile the amount of debt that is being discharged in bankruptcies across the country. The last item on the list is "Obligations to pensions or profit-sharing, and other similar obligations (from schedule F)". Should pension loans being paid back through payroll deductions be listed here?

My first reaction, and that of most of my colleagues is that, whatever these loans are, they are not unsecured, and should not be listed on Schedule F, the schedule of unsecured debts. As these loans would never be listed on schedule F, they would not be listed on the Summary.

But exactly what are these loans, at least within the context of a bankruptcy case? Our court in Rochester is in the Second Circuit (New York, Vermont and Connecticut) so decisions from the Second Circuit Court of Appeals prevail here.

There is a Second Circuit case, from the dawn of the Bankruptcy Code, which holds that pension loans from the NYS retirement system are not bankruptcy "debts" or "claims": In re Villarie, 648 F.2d 810 (2nd Cir. 1981). "It does not give NYCERS the right to sue a member for the amount of the advance. Indeed, should a member retire or resign from the City's employ, NYCERS would merely offset the amount borrowed against his future benefits. In the language of 11 U.S.C. § 502(b), this 'claim is unenforceable against the debtor . . . .' Therefore, it cannot give rise to a debt that can be discharged in bankruptcy." Villarie at 812.

There is a far more significant issue here, beyond how to fill out the bankruptcy forms. Are pension loans a "necessary household expense"? If not, they would not be considered as a justifiable expense in a Chapter 13 case if the creditors are not being paid 100%. The Second Circuit reviewed the issue in In Re Taylor, 243 F.3d 124 (2nd Cir. 2001). In that case, both sides wanted the court to issue a bright line rule saying pension contributions were - or were not - necessary household expenses. The parties focused on the statutory mandates of the NY State retirement system. The court, however, took a more discretionary view:

"Rather than adopt either strict rule, this Court opts for a more flexible solution. It is within the discretion of the bankruptcy court judge to make a decision, based on the facts of each individual case, whether or not the pension contributions qualify as a reasonably necessary expense for that debtor. If the bankruptcy judge finds that the contributions are a reasonably necessary expense for an individual debtor based on the circumstances confronting that debtor, they will not be included in the figure for disposable income, and the pension contributions will continue. Conversely, if the judge finds that the contributions are not a reasonably necessary expense for an individual debtor based on the circumstances confronting that debtor, they will be included in the figure for disposable income, and the contribution deductions will be ordered discontinued for the duration of the Plan." Taylor at 129.

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