§ 138.10     Chapter 7 Trustee Compensation: § 1326(b)(3) after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 138.10, at ¶ ____, LundinOnChapter13.com (last visited __________).

Buried in the provisions for pre- and postconfirmation payments in § 1326, BAPCPA embedded a really strange provision for the recovery of compensation by Chapter 7 trustees in Chapter 13 cases. New § 1326(b)(3) states:

(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.1

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 § 707(b). This is strange.


“Compensation” of a Chapter 7 trustee is a term of art under § 330 of the Bankruptcy Code. Compensation of a Chapter 7 trustee under § 330 is limited by § 326.2 Under § 326(a), the court may allow compensation to a Chapter 7 trustee based upon a percentage of all moneys “disbursed or turned over” by the trustee during the Chapter 7 case. BAPCPA did not amend § 326 or § 330 to suggest that Chapter 7 trustees can be awarded compensation in dismissed or converted cases in which there was no disbursement or turning over of moneys.


It is hard to imagine a Chapter 7 trustee awarded “compensation” in a Chapter 7 case that is dismissed or converted because it is abusive under § 707(b). Abuse of § 707(b)—particularly the presumptive form—will be signaled early on in a Chapter 7 case, before a trustee collects, liquidates and distributes monies. It is even harder to imagine compensation awarded to a Chapter 7 trustee “due to” the conversion or dismissal of the debtor’s prior case under § 707(b).


The House Report gives this account of new § 1326(b)(3):

[I]f a Chapter 7 trustee has been allowed compensation as a result of the conversion or dismissal of the debtor’s prior case pursuant to § 707(b) and some portion of that compensation remains unpaid, the amount of any such unpaid compensation must be repaid in the debtor’s subsequent Chapter 13 case.3

In the unlikely event that a Chapter 7 trustee is awarded compensation due to the conversion or dismissal of a debtor’s prior case pursuant to § 707(b), the amount of compensation recoverable in a subsequent Chapter 13 case is prorated by new § 1326(b)(3) over “the remaining duration of the plan.” Is the remaining duration of the plan different from the length of the plan? The amount of compensation recoverable 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. The $25 maximum monthly 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 Chapter 13 plan. This proration limitation in new § 1326(b)(3)(B) is likely to interfere with the intention stated in the House Report that unpaid Chapter 7 compensation “must be repaid” in a debtor’s subsequent Chapter 13 case.


New § 1326(b)(3) applies whenever a Chapter 7 case is dismissed under § 707(b) and the debtor refiles under Chapter 13. There is no temporal limitation on the refiling—compensation allowed in any prior Chapter 7 case due to conversion or dismissal under § 707(b) would be recoverable in any subsequent Chapter 13 case or cases.


New § 1326(d) adds to this unlikely new trustee compensation collection opportunity that the Chapter 7 trustee compensation collectible under new § 1326(b)(3) “is payable and may be collected . . . even if such amount has been discharged in a prior case.”4 New § 1326(d) doesn’t exactly create a new “exception” to discharge or dischargeability of the sort found in § 523 of the Code; but it authorizes collection of a discharged debt.


This is a new concept: a debt that was not excepted from discharge in a prior Chapter 7 case but is collectible from a debtor in a subsequent Chapter 13 case. There is a temptation to ask how the compensation referred to in § 1326(b)(3) could have been discharged in a prior case for purposes of new § 1326(d). As explained above, the compensation described in subsection (b)(3) arises “due to” the conversion or dismissal of a prior Chapter 7 case under § 707(b). Typically (always?), a § 707(b) conversion or dismissal will occur before discharge. Perhaps § 1326(d) contemplates an intermediate Chapter 7 or Chapter 13 case in which the debtor received a discharge without paying in full compensation awarded to the Chapter 7 trustee in a still earlier Chapter 7 case.


This is a combination of circumstances so unlikely that it raises the question whether something fundamental is missing from the picture in new § 1326(b) and (d). A likely candidate for the missing link would be a provision in § 326 or § 330 allowing the Chapter 7 trustee an award of compensation when a Chapter 7 case is converted or dismissed pursuant to § 707(b).


1  11 U.S.C. § 1326(b)(3), mentioned in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.


2  See 11 U.S.C. § 330(a)(1).


3  H.R. Rep. No. 109-31, at 151.


4  11 U.S.C. § 1326(d)(1).