§ 54.1     Standard Percentage Fee and Expenses
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 54.1, at ¶ ____, LundinOnChapter13.com (last visited __________).

The Chapter 13 trustee collects compensation and reimbursement of expenses as a percentage of every dollar the trustee receives from debtors. The formula for calculating compensation and expense reimbursement is found in 28 U.S.C. § 586(e).1


The general rule is that the Chapter 13 trustee is entitled to deduct a maximum of 10 percent from all payments received by the trustee under plans.2 From that (maximum) 10 percent, the trustee is entitled to a maximum annual compensation not to exceed Level V of the Executive Schedule3 and to the “cash value” of employment benefits provided by the United States to government employees receiving comparable pay.4 The trustee’s annual compensation is fixed by the Attorney General after consultation with the U.S. trustee for the region. In addition to compensation, the trustee is reimbursed for actual, necessary expenses such that the combination of compensation and expense reimbursement does not exceed the 10 percent.


In some jurisdictions, the number of pending cases, the size of the typical plan and the amount of compensation and expenses incurred by the trustee require deduction and use of the full 10 percent from all payments received by the trustee.5 In other jurisdictions, the percentage has been adjusted downward to as little as 3 or 4 percent because there is ample money passing through the trustee’s hand to pay compensation and expenses at the much lower rate. Chapter 13 is thus less expensive for debtors in some districts than in others. In some jurisdictions, the standard percentage is adjusted from month to month to reflect the actual expenses during the prior month. Provision must be made in the plan for the percentage fee deduction by the trustee.6


The Code seems to require that the Chapter 13 trustee take exactly the same percentage from all payments received by the trustee.7 If 10 percent is the standard for the district, 10 percent will be deducted from all payments without regard to the amount of money that is paid to the trustee in a particular case and without regard to the actual expenses incurred by the trustee in administration of that case. The absence of a Code provision for reimbursement of expenses on a case-by-case basis has peculiar effects when the Chapter 13 trustee incurs extraordinary expenses in a specific case.8


One obvious effect of this across-the-board percentage fee structure is that cases with larger payments bear a greater share of the cost of administration of the Chapter 13 program in a district.9 Debtors are penalized for paying more of their debts through the trustee, particularly debts like home mortgages with larger monthly payments. To deal with this inequity and to facilitate plans with large debt loads and large monthly payments, trustees and courts have been creative to reduce the standard percentage fee in individual cases or even as to individual claims.10


The practice of adjusting fees in individual cases is an accommodation of the need for trustees to collect sufficient expense money to administer the Chapter 13 program with the concern that no individual debtor should bear a disproportionate share of the burden of that administration. Unfortunately, the Bankruptcy Code does not obviously authorize a standing Chapter 13 trustee to adjust the percentage on any basis except with respect to all cases assigned to the trustee. 28 U.S.C. § 586(e)(2) requires the Chapter 13 trustee to collect the percentage fee fixed by the Attorney General “from all payments received by” the trustee. By statute, the percentage fee is not calculated based on individual cases or disbursements to individual creditors. It is difficult to interpret this statute to permit a standing Chapter 13 trustee any practice except deduction of a single percentage fee from all payments received in all cases.


The statute is inequitable for many debtors and, indirectly, for creditors in Chapter 13 cases. The Chapter 13 trustee incurs the same administrative expense to issue a monthly check to a mortgage company for $1,000 or to issue a monthly check for $20 to the holder of a security interest in the debtor’s water bed. Literal application of the statute requires the Chapter 13 trustee to charge a Chapter 13 debtor $100 a month for the privilege of paying the $1,000 mortgage payment and only $2 per month for issuing the water bed check. The statutory fee is grotesquely unrelated to the real cost of administering the mortgage claim through the Chapter 13 trustee’s office.


28 U.S.C. § 586(e)(2) should be rewritten to clearly permit a Chapter 13 trustee to adjust the percentage fee with respect to individual Chapter 13 cases and with respect to specific claims within Chapter 13 cases. Trustees should be given flexibility to equalize the burden of the costs of administration of Chapter 13 plans within a district. Courts should encourage equitable adjustments of fees and compensation. Everybody wins—debtors pay less money to accomplish the same distributions to creditors, and creditors get a greater share of the money being paid to the Chapter 13 trustee by debtors.11


There is some disagreement whether 28 U.S.C. § 586(e) entitles the Chapter 13 trustee to a commission on funds received for the purpose of paying the fees and commissions of the standing trustee. If the portion of payments to the Chapter 13 trustee used to pay fees and commissions is subject to the percentage fee under § 586(e)(2), then to accomplish a distribution to creditors of $100 in a district where the trustee receives the 10 percent statutory maximum, the debtor must pay the trustee $111.11. If fees are not payable upon fees, then, to accomplish a $100 distribution to creditors, the debtor must submit only $110.


In Edge v. Maikoff (In re Edge),12 the court held that the standing Chapter 13 trustee was not entitled to compensation on funds received to pay statutory fees. As explained by the court, “funds paid to a standing trustee for purposes of paying the standing trustee’s percentage fee are not payments under a Chapter 13 repayment plan. Thus, they are not subject to the standing trustee’s percentage fee.”13


In contrast to Edge, in Foulston v. BDT Farms, Inc. (In re BDT Farms, Inc.),14 the Tenth Circuit interpreted 28 U.S.C. § 586(e) to entitle a trustee to collect the percentage fee from all monies received from the debtor, including the portion used to pay the fees of the trustee. BDT Farms, Inc. was a Chapter 12 case, but in this respect 28 U.S.C. § 586(e) uses identical language to describe the entitlements of Chapter 12 and Chapter 13 trustees. The Tenth Circuit based its holding in part on the fact that the Executive Office of the United States Trustee interpreted § 586(e) to permit “fees on fees” and that interpretation was entitled to deference because it was not inconsistent with the statute.15


Consistent with Edge, again in a Chapter 12 case, the Eighth Circuit disagreed with the Tenth Circuit and held that a standing trustee is not entitled to a commission on the portion of funds received from the debtor that are used to pay the trustee’s commission.16 The Eighth Circuit found § 586(e) to be “ambiguous” and labeled the U.S. trustee’s interpretation “unreasonable.”17 The Eighth Circuit explained that the U.S. trustee’s interpretation “effectively results in an 11.11% fee in violation of the 10% cap of section 586(e)(1).”18


The Supreme Court or Congress will eventually have to straighten out this disagreement. In the meantime, practice varies among Chapter 13 trustees—some program their computers to calculate “fees on fees”; others exclude from the fee calculation that portion of the money received from the debtor that is used to pay fees.


The percentage fee for trustees’ compensation and expenses is paid by the debtor in a Chapter 13 case, not by creditors. In other words, the percentage is deducted before distributions to creditors, and the mathematical tests for confirmation are measured against the amount available for creditors, not against the amount that the debtor pays to the trustee.19


For example, if a debtor must pay $5,000 to unsecured claim holders to satisfy the best-interests-of-creditors test in § 1325(a)(4),20 it will not be sufficient for the debtor to pay $5,000 to the Chapter 13 trustee. In addition, the debtor must pay the percentage for compensation and expenses to which the trustee is entitled in the district. If the percentage fee is 10 percent, to accomplish a distribution of $5,000 to unsecured claim holders the debtor must pay $5,555.55 to the Chapter 13 trustee.21


The Attorney General, after consultation with the U.S. trustee, fixes the compensation and expense deductions for each Chapter 13 trustee (in U.S. trustee districts).22 Under prior law, the bankruptcy courts fixed the fees of standing Chapter 13 trustees. There was some dispute whether the bankruptcy courts retained any responsibility for policing trustee fees in Chapter 13 cases during the pilot period for the U.S. trustee program.23 After the 1986 amendments to the Code, it seems doubtful that debtors’ counsel or trustees will successfully argue that the courts can alter the fees and compensation of Chapter 13 trustees after fixing by the Attorney General.24


There are incentives for the Chapter 13 trustee to ask that the standard percentage fee be adjusted from time to time. Chapter 13 trustees pride themselves that the percentage fee is as low as possible to maximize payments to creditors and minimize the cost of Chapter 13 cases. If the trustee deducts more than is necessary for compensation and reimbursement of expenses, the excess is payable to the U.S. Trustee System Fund and not to creditors or debtors.25 Experienced standing trustees closely monitor their budgets and the percentage fee deduction to avoid creating surpluses.


1  28 U.S.C. § 586(e) is not effective with respect to judicial districts for the states of Alabama and North Carolina.


2  This general rule of a maximum 10% fee applies in cases in which the debtor “is not a family farmer.” 28 U.S.C. § 586(e)(1)(B)(i). “Family farmer” is a phrase of art defined in 11 U.S.C. § 101(18). Although some debtors who meet the definition of family farmer will not be eligible for Chapter 13 relief and others will choose instead to file a Chapter 12 case, there will be situations in which an individual debtor meets the definition of family farmer, is eligible for Chapter 13 relief, and chooses to file a Chapter 13 case—for example, to take advantage of the broader discharge provision in a Chapter 13 case. See §§ 4.2 [ Debtor Not Eligible for Chapter 12 ] § 8.4  Chapter 12 Not Available or Not Helpful and 4.9 [ Discharge or Dischargeability Problems ] § 8.11  Discharge or Dischargeability Problems. See also discussion of conversion to Chapter 12 in § 323.1 [ Standing, Procedure and Strategic Considerations ] § 147.1  Standing, Procedure and Strategic Considerations. In a Chapter 13 case in which the debtor meets the definition of family farmer, 28 U.S.C. § 586(e)(1)(B)(ii) limits the (maximum) 10% deduction to “the payments made under the plan . . . in an aggregate amount not to exceed $450,000 . . . .” The trustee’s percentage fee is fixed at 3% with respect to “payments made under the plan [of a family farmer] . . . after the aggregate amount of payments made under the plan exceeds $450,000.” 28 U.S.C. § 586(e)(1)(B)(ii)(II). Because the number of Chapter 13 cases involving family farmers is small and because the subset of those cases in which payments under the plan exceed $450,000 is even smaller, the general rule prevails that 28 U.S.C. § 586(e)(1)(B) permits a maximum percentage fee of 10% with respect to Chapter 13 debtors.


3  At this writing, this maximum (including an allowance for benefits) is $154,457.


4  28 U.S.C. § 586(e)(1)(A)(ii).


5  See In re Howard, 3 B.R. 75 (Bankr. S.D. Cal. 1980); In re Breckenridge, 12 B.R. 159 (Bankr. S.D. Ohio 1980); In re Beaver, 2 B.R. 337 (Bankr. S.D. Cal. 1980).


6  See Apps. C and D for the mathematical calculation of compensation as part of the plan.


7  28 U.S.C. § 586(e)(2) reads in part: “[S]uch individual shall collect such percentage fee from all payments received by such individual under plans in the cases under chapter . . . 13 . . . for which such individual serves as standing trustee.”


8  See § 60.1 [ Avoidance and Recovery Powers ] § 53.12  Avoidance and Recovery Powers.


9  This inequity is compounded because the marginal cost of administering the next case is not significantly greater in cases with larger monthly payments.


10  See §§ 64.1 [ Lowered Percentage in a Case ] § 54.3  Lowered Percentage in a Case and 64.2 [ “No-Costing” Payments on a Claim ] § 54.4  “No-Costing” Payments on a Claim.


11  The U.S. trustee is entitled by statute to receive any money left after paying the actual compensation and reimbursement of expense of a Chapter 13 trustee under 28 U.S.C. § 586(e)(2). If the amount deducted by a Chapter 13 trustee exceeds the amount actually necessary for compensation and reimbursement of expenses, the balance is paid to help fund the U.S. trustee system. There is no evidence that the Justice Department misperceives Chapter 13 as a potential profit center for funding of the U.S. trustee system.


12  122 B.R. 219 (D. Vt. 1990).


13  122 B.R. at 221.


14  21 F.3d 1019 (10th Cir. 1994).


15  21 F.3d at 1023.


16  Pelofsky v. Wallace (In re Wallace), 102 F.3d 350 (8th Cir. 1996).


17  102 F.3d at 355.


18  102 F.3d at 355.


19  See In re Turner, 168 B.R. 882 (Bankr. W.D. Tex. 1994) (Chapter 13 debtor, not creditors, must pay the percentage fee for compensation of a standing Chapter 13 trustee in 28 U.S.C. § 586(e). To satisfy the confirmation tests in § 1325(a)(4), (a)(5) and (b), payments to the trustee must exceed the amounts that are to be distributed to creditors by the additional amount of the trustee’s percentage fee.).


20  See § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1  In General: Plan Payments vs. Hypothetical Liquidation.


21  This assumes that the Tenth Circuit is correct in Foulston v. BDT Farms, Inc. (In re BDT Farms, Inc.), 21 F.3d 1019 (10th Cir. 1994), that 28 U.S.C. § 586(e) entitles a trustee to collect the percentage fee from all monies received from the debtor, including the money used to pay the fees and expenses of the trustee. The magic multiplier in a 10% district would be 1.11111 times the amount that must be distributed to creditors. Thus, $5,000 times 1.11111 equals $5,555.55. Put another way, after deduction of the 10% for compensation and expenses, a payment to the trustee of $5,555.55 leaves $5,000 for distribution to creditors ($5,555.55 times .9 equals $5,000). The example in the text also assumes that the present value of the $5,000 remaining for unsecured creditors is sufficient to satisfy § 1325(a)(4). See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend.


22  28 U.S.C. § 586(e)(1).


23  See In re Tartaglia, 62 B.R. 398 (Bankr. D.R.I. 1986) (Notwithstanding trustee’s argument that the statutory fee payable to a standing Chapter 13 trustee must be deducted from all payments made by the trustee and that the fee is beyond judicial review, court allows trustee 10% statutory fee on home mortgage payments to be made through the plan subject to review for reasonableness at the end of the case.); In re Sousa, 61 B.R. 105 (Bankr. D.R.I. 1986) (After review of standing Chapter 13 trustee’s records and arguments, court awards compensation equal to about 50% of the statutory fee described in 28 U.S.C. § 586(e) and equivalent to approximately 5% of the funds collected and administered by the trustee.); In re Savage, 60 B.R. 10 (Bankr. D.R.I.) (Bankruptcy court has authority to review fees of standing Chapter 13 trustee serving in a U.S. trustee pilot area.), rev’d, 67 B.R. 700 (D.R.I. 1986); In re Sousa, 46 B.R. 343 (Bankr. D.R.I. 1985).


24  See In re Bernard, 201 B.R. 600, 604 (Bankr. D. Mass. 1996) (“[T]he Court does not have the authority to reduce Chapter 13 Trustee’s fee.”); In re Harris, 200 B.R. 745, 747–48 (Bankr. D. Mass. 1996) (“The fee—as a percentage of payments the trustee receives under Chapter 13 plans—is set by the Attorney General, after consultation with the United States trustee who appointed the standing trustee. . . . Section 586(e)(2) requires that the fee be assessed and collected on all payments that the standing trustee receives under Chapter 13 plans. . . . [T]he Bankruptcy Code makes no provision for adjustment of the standing trustee’s fee in individual cases, on a case-by-case basis. In fact, the bankruptcy court lacks authority in Chapter 13 cases to set, review, or otherwise adjudicate the amount of the fee.”); In re Teagardner, 98 B.R. 318 (Bankr. S.D. Ohio 1989) (Percentage fee for Chapter 13 trustee is fixed by the Attorney General in a U.S. trustee district. Debtor’s challenge to 8% charge on “conduit mortgage payments” is not cognizable in the bankruptcy court.).


25  See 28 U.S.C. § 586(e)(2).