§ 54.6     Compensation on Direct Payments by Debtor
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 54.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The Chapter 13 trustee is entitled to collect a 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.”1 Prior to 1986, 28 U.S.C. § 586(e)(2) and its counterpart for nonpilot U.S. trustee districts, 11 U.S.C. § 1302(e)(2), read: “[S]uch individual shall collect such percentage fee from all payments under plans in the cases under this chapter for which such individual serves as standing trustee.”2

[2]

Under the old statute, there was much debate whether the Chapter 13 trustee was entitled to collect the percentage fee from payments made by the debtor directly to a creditor. Many courts held that the trustee was entitled to compensation and expenses even though the debtor acted as disbursing agent and made the payments directly to creditors.3

[3]

With the 1986 amendments, it is difficult to argue that the Chapter 13 trustee is entitled to a percentage fee from payments a debtor makes directly to creditors.4 Section 586(e)(2) requires collection of the percentage fee only “from all payments received by” the Chapter 13 trustee. A payment made directly by the debtor to a creditor is not a payment received by the trustee. The Executive Office of the United States Trustee has indicated it will not seek to impose percentage fees on payments made directly by debtors to creditors in Chapter 13 cases.

[4]

The change in the statute in 1986 clarifies that there is a significant incentive for debtors to propose payments directly to creditors. Particularly large payments, such as the continuing payment on a home mortgage, if made through the Chapter 13 trustee, will generate a large fee. If the debtor exercises the § 1326 option to make payments directly to a creditor,5 the debtor avoids the added cost of paying trustee’s fees. In cases with very tight budgets, debtor’s counsel may be obligated to propose some direct payments by the debtor to creditors to ensure feasibility of the plan.

[5]

Chapter 13 trustees can be expected to object to widespread use of the debtor as a disbursing agent as a technique for avoiding payment of fees.6 At one extreme, the payment of all claims directly by the debtor would cripple any Chapter 13 program by eliminating funding for the trustee. At the other extreme, the rewording of 28 U.S.C. § 586(e) in 1986 coupled with authorization of direct payments by debtors under 11 U.S.C. § 1326(c)7 argue against a per se prohibition of direct payments to avoid fees. The rule must be somewhere in between, to be fleshed out in individual cases.


 

1  28 U.S.C. § 586(e)(2) (emphasis added).

 

2  28 U.S.C. § 586(e)(2) (prior to 1986 amendment) (emphasis added).

 

3  See Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. 1982); In re Mascari, 70 B.R. 325 (Bankr. N.D.N.Y. 1987); In re Hankins, 62 B.R. 831 (Bankr. W.D. Va. 1986); In re Case, 11 B.R. 843 (Bankr. D. Utah 1981); In re Hines, 7 B.R. 415 (Bankr. D.S.D. 1980); In re Centineo, 4 B.R. 654 (Bankr. D. Neb. 1980).

 

4  See In re Wright, 82 B.R. 422 (Bankr. W.D. Va. 1988) (1986 amendments to 28 U.S.C. § 586(e)(2) overrule Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. 1982), and In re Hankins, 62 B.R. 831 (Bankr. W.D. Va. 1986). The Chapter 13 trustee is only entitled to collect a percentage fee from payments “received by” the trustee; thus the trustee is not entitled to commissions on payments by a debtor directly to a creditor.). Accord In re Harris, 107 B.R. 204 (Bankr. D. Neb. 1989). But see In re Carr, 159 B.R. 538 (D. Neb. 1993) (Without discussion of 28 U.S.C. § 586(e), Chapter 13 trustee is entitled to compensation with respect to payments by the debtor directly to a secured claim holder where motion to allow claims indicated that trustee was seeking fees on direct payments “if allowed” and debtor did not object.).

 

5  See § 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10  Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise.

 

6  See § 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10  Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise for discussion of “feasibility” objection to direct payment of creditors by the debtor. See also § 179.3 [ Burden of Administration ] § 104.4  Burden of Administration for discussion of “good-faith” objection to confirmation of a plan that will not bear its own administrative expense.

 

7  See § 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10  Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise.