Cite as: Keith M. Lundin, Lundin On Chapter 13, § 113.8, at ¶ ____, LundinOnChapter13.com (last visited __________).
BAPCPA will affect the way Chapter 13 plans structure the order of payments to creditors.
The broad authority in § 1322(b)(4) that the Chapter 13 plan can “provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim” was not changed by BAPCPA.1 But BAPCPA did change the entitlements of some secured creditors and other claim holders in ways that will reduce the flexibility that Chapter 13 debtors have to design payment protocols.
BAPCPA amended § 1325(a)(5) to require that when the plan calls for periodic payments to an allowed secured claim holder, such payments “shall be in equal monthly amounts.”2 BAPCPA added the requirement that with respect to claims secured by personal property, periodic payments “shall not be less than an amount sufficient to provide . . . adequate protection during the period of the plan.”3
These two new rules for payment of allowed secured claims will force Chapter 13 debtors to design plans that provide equal monthly payments in amounts that at least provide adequate protection during the life of the plan. This could change the way many Chapter 13 plans are designed, especially during the early months after confirmation.
It is not uncommon for Chapter 13 plans to pay administrative expenses such as attorney’s fees in advance of payments to other creditors.4 In some districts, child support is distributed before payments to other creditors. The equal payment and adequate protection entitlements of allowed secured claim holders under new § 1325(a)(5)(B)(iii) will require Chapter 13 debtors to recalculate the amount of money passing through the plan so that there will be enough to make equal payments in at least the amount required to provide adequate protection, notwithstanding the payment of attorney’s fees, child support or other claims that might have had higher priority under pre-BAPCPA practice.
Chapter 13 debtors will have to fund Chapter 13 plans from the beginning with enough money to make the periodic payments to allowed secured claim holders and have enough money left over for other required payments. Before BAPCPA, it was not uncommon that front-end payments of attorney’s fees, child support or other “higher priority” claims would eat into the available funds during the early months after confirmation with the result that secured claim holders would sometimes get less than the monthly amount called for by the confirmed plan. After BAPCPA, the mathematics of Chapter 13 plans must be reexamined to ensure that there is enough money from the first month after confirmation to pay equal payments that adequately protect secured claim holders and still meet the other payment obligations provided for in the plan. Secured claim holders will object to confirmation of any plan that is not funded at a level sufficient to maintain equal periodic payments from the first months of distribution after confirmation. Debtors’ attorneys who insist on payment of fees during the early months after confirmation will have to design plans with sufficient funding to have money left over for payment of attorneys’ fees after the equal periodic payments required to allowed secured claim holders.
It is unclear at this early stage of Chapter 13 practice after BAPCPA exactly how the changed treatment of unsecured claim holders will affect the order of payments under confirmed plans. Before BAPCPA, it was not uncommon for Chapter 13 plans to provide specific monthly payments for secured claim holders and to then create a “pot” or “pool” for payment of unsecured creditors. The size of the pot or pool was determined by the disposable income test in § 1325(b).5 Under pre-BAPCPA practice, unsecured claim holders were rarely provided a specific monthly distribution. Instead, the confirmed plan promised that the pot would be paid to the trustee and unsecured claim holders would be paid pro rata after payment of secured and priority debts. To satisfy the best-interests-of-creditors test in § 1325(a)(4), a minimum percentage was also specified, and unsecured claim holders would get the greater of that percentage or a pro rata share of the pot.6
The best-interests-of-creditors test was not changed by BAPCPA, and unsecured claim holders are still entitled to the minimum percentage that would be paid in a hypothetical Chapter 7 case.7 But BAPCPA dramatically changed the way in which the entitlement of unsecured creditors is calculated under the disposable income test in § 1325(b). After BAPCPA, upon objection to confirmation by the trustee or the holder of an allowed unsecured claim, § 1325(b) will require a specific amount that must be paid to unsecured creditors to accomplish confirmation.8 That amount will be the product of multiplying disposable income determined under § 1325(b)(2)9 times the applicable commitment period determined under § 1325(b)(4).10
The order in which unsecured creditors are paid through a Chapter 13 plan was not directly changed by BAPCPA. The amounts calculated must be paid to unsecured creditors but not at any particular time after confirmation and not in any particular order with respect to the payment of other creditors. It seems most likely that debtors will continue to propose specific monthly payments to secured claim holders to satisfy the new requirements in § 1325(a)(5), and unsecured claim holders will receive distributions when and as money becomes available. For example, if the debtor has provided $500 per month for payment to a car lender and that car lender’s allowed secured claim will be paid in full in 24 months, unsecured creditors would begin to receive distributions from that $500 after the car lender is paid in full—that is, after 24 months after confirmation. Payments by the debtor into the plan would necessarily continue until unsecured creditors have received at least the percentage required by the best-interests-of-creditors test in § 1325(a)(4) and the minimum amount required by the disposable income test in § 1325(b).
This outcome is not so unlike pre-BAPCPA practice, but the twist is that the mathematics just described is not determined “backward” from the debtor’s actual budget. Under pre-BAPCPA practice, the debtor’s actual income and actual expenses would be netted at or about the time of confirmation, and the difference would be available for payments to creditors through the plan. Upon objection to confirmation by the trustee or the holder of an allowed unsecured claim, the disposable income test would require the debtor to pay all of that difference to the trustee for at least 36 months. The percentage payment to unsecured creditors would then be determined based on the amount of money available from the debtor’s budget.
After BAPCPA, the amount that must be paid to unsecured creditors is determined by a mathematical formula that does not reflect the actual financial circumstances of the debtor or the terms of the plan.11 If the debtor’s actual budget contains sufficient income to pay secured claim holders consistent with new § 1325(a)(5) and commence payments to unsecured creditors immediately after confirmation, then the debtor can design a confirmable Chapter 13 plan after BAPCPA that immediately begins distributions to unsecured creditors. It is conceivable that a debtor with improving financial circumstances will be able to satisfy unsecured claim holders under the best-interests-of-creditors test and the disposable income test relatively quickly after confirmation. In that case, the order of payments to creditors might include distributions to unsecured creditors contemporaneously with the payment of allowed secured claims and beginning immediately after confirmation.
BAPCPA created new priority claims and changed the order of priority of other claims.12 Because priority claims are entitled to full payment through a Chapter 13 plan,13 Chapter 13 plans before BAPCPA separately classified priority debts for payment in full when other unsecured claim holders are not to be paid in full. BAPCPA does not prohibit this practice. Because there are new and enlarged claims entitled to priority after BAPCPA, it is likely that more Chapter 13 plans will contain distribution arrangements that separately classify priority debts for more favorable treatment than other unsecured claims. Because priority debts are unsecured debts, distributions to priority claim holders through Chapter 13 plans will reduce the amount of money available for general unsecured claim holders under the new math of BAPCPA.14
Finally, one of the strangest provisions added to the Bankruptcy Code by BAPCPA may occasionally impact the order of payments to creditors in Chapter 13 cases. BAPCPA added a new paragraph (3) to § 1326(b) as follows:
(b) Before or at the time of each payment to creditors under the plan, there shall be paid—
. . . .
(3) if a chapter 7 trustee has been allowed compensation due to the conversion or dismissal of the debtor’s prior case pursuant to section 707(b), and some portion of that compensation remains unpaid in a case converted to this chapter or in the case dismissed under section 707(b) and refiled under this chapter, the amount of any such unpaid compensation, which shall be paid monthly—
(A) by prorating such amount over the remaining duration of the plan; and
(B) by monthly payments not to exceed the greater of—
(i) $25; or
(ii) the amount payable to unsecured nonpriority creditors, as provided by the plan, multiplied by 5 percent, and the result divided by the number of months in the plan.15
New § 1326(b)(3) allows a Chapter 7 trustee to recover compensation in a Chapter 13 case when the Chapter 7 trustee was allowed compensation “due to the conversion or dismissal of the debtor’s prior case pursuant to section 707(b).” The compensation recoverable under § 1326(b)(3) is prorated over “the remaining duration of the plan” and is limited to monthly payments not exceeding the greater of $25 or 5 percent of the amount payable to unsecured, nonpriority creditors under the plan. This new section contemplates that payments of compensation will be made through the plan on a monthly basis at the same time as “each payment” to other creditors under the plan.
This is all very strange. “Compensation” of a Chapter 7 trustee is a term of art referring to an award under § 326. Compensation of a Chapter 7 trustee is based on a percentage of monies “disbursed or turned over” during the Chapter 7 case. There is no amendment of § 1326 by BAPCPA to suggest that Chapter 7 trustees get compensation in dismissed or converted cases in which there was no disbursement or turning over of monies. It is hard to fathom the circumstances under which a Chapter 7 trustee will be awarded compensation in a Chapter 7 case that is dismissed or converted under § 707(b).
If there is such compensation, and if it was “due to” the conversion or dismissal of the debtor’s prior case pursuant to § 707(b), then § 1326(b)(3) will impact the order of payments to creditors by requiring monthly payments to the lame-duck trustee not to exceed $25 or 5 percent of the amount payable to unsecured nonpriority creditors through the plan. The $25 maximum payment in § 1326(b)(3)(B)(i) means that the Chapter 7 trustee cannot recover more than $1,500 in a 60-month Chapter 13 plan except in the (unlikely) event that unsecured, nonpriority creditors are to receive more than $30,000 through the plan.
New § 1326(b)(3) applies when a Chapter 7 case is dismissed under § 707(b) and the debtor then refiles under Chapter 13. There is no temporal limitation in this new section—compensation allowed in any prior Chapter 7 case dismissed or converted under § 707(b) would appear to be recoverable in any subsequent Chapter 13 case. New § 1326(d) adds that compensation under § 1326(b)(3) may be collected by the trustee “even if such amount has been discharged in a prior case.”16 Though it seems unlikely that § 1326(b)(3) claims will be common, any such claim would probably be entitled to a specific monthly payment in the construction of the Chapter 13 plan.
1 See 11 U.S.C. § 1322(b)(4), discussed in § 204.2 [ Order of Payments to Creditors ] § 113.7 Order of Payments to Creditors before BAPCPA.
2 11 U.S.C. § 1325(a)(5)(B)(iii)(I), discussed in § 448.1 [ Equal Monthly Installments ] § 74.14 Equal Monthly Installments after BAPCPA.
3 11 U.S.C. § 1325(a)(5)(B)(iii)(II), discussed in § 449.1 [ “Adequate Protection” after Confirmation ] § 74.15 “Adequate Protection” after Confirmation after BAPCPA.
4 See §§ 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8 Special Provisions for Attorneys’ Fees and 204.2 [ Order of Payments to Creditors ] § 113.7 Order of Payments to Creditors before BAPCPA.
5 See discussion of projected disposable income test beginning at § 91.1 In General.
6 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims.
7 See 11 U.S.C. § 1325(a)(4), discussed in § 464.1 [ New Exclusions and Exemptions ] § 90.3 Exclusions and Exemptions after BAPCPA.
8 See discussion of projected disposable income test beginning at § 92.1 In General.
9 See discussion of projected disposable income test beginning at § 92.1 In General.
10 See § 493.1 [ Applicable Commitment Period Calculation ] § 100.1 Applicable Commitment Period Calculation.
11 See § 494.1 [ Projected Disposable Income ] § 101.1 What Do Unsecured Creditors Get?.
12 See § 440.1 [ New and Changed Priority Claims ] § 73.3 Priority Claims Added or Changed by BAPCPA.
13 See 11 U.S.C. § 1322(a)(2), discussed in § 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6 Treatment of Priority Claims Changed by BAPCPA.
14 See § 494.1 [ Projected Disposable Income ] § 101.1 What Do Unsecured Creditors Get?.
15 11 U.S.C. § 1326(b)(3).
16 11 U.S.C. § 1326(d)(1), discussed in § 556.1 [ Chapter 7 Trustee Compensation: § 1326(d) ] § 159.9 Chapter 7 Trustee Compensation: § 1326(d).