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Using Chapter 11 to Shed Extravagant Benefit Packages

By ALM Staff | Law Journal Newsletters |

In May of this year, a bankruptcy court allowed United Airlines to terminate certain of its defined benefit pension plans, clearing the way for the largest pension default in U.S. history. The default will save United an estimated $645 million a year in pension contributions, part of the $2 billion in annual savings it says it needs to emerge from Chapter 11. United's success has led to speculation that other corporations with generous and/or underfunded pension and other retiree benefit plans will also use bankruptcy to clean 'legacy costs' off their balance sheets. Modification or termination of such liabilities in Chapter 11, however, is not without difficulty.

Pension and other retiree benefits are a significant cost to any large corporation. Recently, General Motors indicated that it must reduce the costs of its pensions and other retiree benefit plans to survive. Currently, GM has 422,000 retirees for which the company will spend $5.6 billion for health-care benefits in 2005. GM's so-called 'legacy costs' amount to approximately $1500 per vehicle. Scherer R: Rising Benefits Burden. The Christian Science Monitor (abcnews.go.com/International/CSM/story?id=831879).

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