In the event a plan participant files bankruptcy—typically chapter 7 or 13—a number of issues can arise for a pension plan. Since the modern Bankruptcy Code of 1978 was enacted, many courts have taken the view that a pension plan loan does not create a “debt” for purposes of the bankruptcy. This view, which avoids various thorny issues that could otherwise arise for both the pension plan and participant, emanates from a decision by the United States Court of Appeals for the Second Circuit, In re Villarie, 648 F.2d 810 (2d Cir. 1981). Recently, however, a bankruptcy court has challenged this seemingly well established concept, which could have ramifications for pension plans. This article will provide further background, an explanation of the recent decision, and identify one potential effect.

Employee Benefits Group partner Chris Sears serves as a private sector faculty member for the American Law Institute Continuing Legal Education’s annual advanced course for Employee Benefit Plans of Tax-Exempt and Governmental Employers in Washington, D.C.