§ 73.3     Priority Claims Added or Changed by BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 73.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA created or modified at least four categories of priority claims. These new and changed priority debts are important in Chapter 13 cases because, absent consent of the claim holder, every Chapter 13 plan must provide for full payment of all claims entitled to priority, without regard to what priority the Code assigns.1

[2]

Section 507 of the Code lists the expenses and claims that have priority. Before BAPCPA, first priority was administrative expenses allowed under § 503(b). BAPCPA reduced administrative expenses to second priority and installed a new first priority for domestic support obligations:

(a) The following expenses and claims have priority in the following order:
(1) First:
(A) Allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit on behalf of such person, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition shall be applied and distributed in accordance with applicable nonbankruptcy law.
(B) Subject to claims under subparagraph (A), allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition, are assigned by a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative to a governmental unit (unless such obligation is assigned voluntarily by the spouse, former spouse, child, parent, legal guardian, or responsible relative of the child for the purpose of collecting the debt) or are owed directly to or recoverable by a governmental unit under applicable nonbankruptcy law, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition be applied and distributed in accordance with applicable nonbankruptcy law.
(C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302, the administrative expenses of the trustee allowed under paragraphs (1)(A), (2), and (6) of section 503(b) shall be paid before payment of claims under subparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.2
[3]

Domestic support obligation (DSO) is broadly defined by BAPCPA in new § 101(14A) to include all claims in the nature of alimony, maintenance or support that accrue before or after a bankruptcy petition, including interest that accrues under nonbankruptcy law, owed to or recoverable by spouses, former spouses, children, legal guardians or responsible relatives—just about anything, owed to anyone, that smells like child or spousal support—so long as the debt is “not assigned to a nongovernmental entity, unless . . . assigned voluntarily . . . for the purpose of collecting the debt.”3 The new definition of DSO is broader than “alimony, maintenance or support” that was assigned a seventh priority by § 507(a)(7) prior to BAPCPA.

[4]

The class of folks who can hold a DSO has been expanded to include parents, legal guardians and responsible relatives. DSO includes postpetition interest allowable under nonbankruptcy law and includes obligations “established or subject to establishment before, on or after the date of the order for relief.”4

[5]

The new first priority in § 507(a)(1)(A) is limited in one new way: only allowed “unsecured claims” for DSOs have priority. Under pre-BAPCPA law, the seventh priority extended to “allowed claims” for alimony, maintenance or support without regard to whether the debt was secured or unsecured.5 Secured debts in the nature of alimony, maintenance or support that fit the definition of DSO in § 101(14A) will not be priority claims under new § 507(a)(1). A secured DSO will be entitled to treatment as a secured claim at confirmation,6 but the priority status of secured domestic support claims under prior law was revoked by BAPCPA.

[6]

Unsecured DSOs that are assigned to a governmental unit or owed directly to or recoverable by a governmental unit are a sort of one and one-half priority under § 507(a)(1)(B). The slight subordination has little impact in Chapter 13 cases because all priorities in § 507(a) have the same entitlement—full payment under § 1322(a)(2).7

[7]

The same can be said for treatment of administrative expenses of a trustee under new § 507(a)(1)(C). To the extent a Chapter 13 trustee administers assets that are available for payment of a DSO, new § 507(a)(1)(C) allows an administrative expense that “shall be paid before payment” of the DSO.8 The effect of this protection for the trustee’s administrative expenses is uncertain in a Chapter 13 case because the Code is less than clear whether the expenses of a standing Chapter 13 trustee are “administrative expenses” for purposes of § 503(b).9 That new § 507(a)(1)(C) lists § 1302 as a possible source for administrative expenses allowable under § 503(b) indicates that the drafters of BAPCPA believed that a Chapter 13 trustee could have administrative expenses allowable under § 503(b) that would prime payment of a DSO.

[8]

In Chapter 7 cases, it may be necessary for the trustee to apportion administrative expenses to determine the fraction eligible for priority ahead of other first priorities in § 507(a)(1)(C). In a Chapter 13 case, this allocation is less important because, again, all expenses and claims entitled to priority under § 507(a) get the same full-payment treatment. New § 507(a)(1)(C) raises the possibility that some of the expense of a Chapter 13 trustee will have “one and one-half” priority, some will be second priority under § 503(b), and some or all will simply be paid through the usual mechanism in 28 U.S.C. § 586(e).

[9]

One thing is clear, for purposes of drafting a confirmable plan after BAPCPA, allowed unsecured claims for DSOs are broadly defined as first priority claims that must be paid in full to accomplish confirmation under § 1322(a)(2) unless the holder of a particular claim agrees otherwise.

[10]

There is an odd condition in the new first priority for DSOs that funds received by a governmental unit after the filing of the petition “shall be applied and distributed in accordance with applicable nonbankruptcy law.”10 This is positioned by BAPCPA as a condition on whether a DSO claim filed by a governmental unit will be entitled to the new priority in § 507(a). How will a Chapter 13 trustee—or any other party in interest—know whether a governmental unit filing a claim for a DSO will apply and distribute any funds it receives “in accordance with applicable nonbankruptcy law”? Perhaps a governmental unit that files a claim for a DSO in a Chapter 13 case must certify that the condition in new § 507(a)(1) will be satisfied under the plan. Without some evidence that the condition is performed, it is arguable that the claim is not entitled to priority.

[11]

DSO claims assigned to a nongovernmental entity are not mentioned in the new § 507(a) priority. A debt in the nature of alimony, maintenance or support assigned to a nongovernmental entity stops being a DSO under § 101(14A) unless it was assigned “for the purpose of collecting the debt.” A debt for alimony, maintenance or support assigned to a nongovernmental entity for the purpose of collecting debt is a DSO.

[12]

What do we make of the absence of mention in new § 507(a) of whether a DSO assigned to a nongovernmental entity for the purposes of collecting debt is entitled to priority? Arguably, a DSO assigned to a nongovernmental entity for the purpose of collecting the debt remains an “unsecured claim[ ] for [a] domestic support obligation[ ]” entitled to first priority under § 507(a)(1)(A). On the other hand, the specific discussion in § 507(a)(1) of DSOs assigned to governmental entities, without mention of DSOs assigned to nongovernmental entities, could be interpreted to exclude DSOs assigned to nongovernmental entities from the priority in § 507(a)(1). A DSO assigned to a governmental unit “for the purpose of collecting the debt” would probably be a claim filed by a governmental unit “on behalf of” the original holder of the DSO and would appear to fall within the first priority described in § 507(a)(1)(A), subject to the condition discussed above.

[13]

Because all DSOs are nondischargeable in a Chapter 13 case11—without regard to whether the DSO is also entitled to priority under § 507(a)—all DSO claims may be eligible for the payment of postpetition interest through the plan under new § 1322(b)(10).12 This would be in addition to, if not somewhat inconsistent with, the inclusion of postpetition interest in the DSO claim itself by definition in new § 101(14A).13 The inconsistency arises because the payment of postpetition interest on a nondischargeable claim under new § 1322(b)(10) is conditioned that the debtor has sufficient disposable income to provide for full payment of all allowed claims. No such condition would apply to payment of postpetition interest that is part of a DSO claim entitled to first priority under § 507(a)(1) and full payment under § 1322(a)(2).14

[14]

Under new § 1322(a)(4), a plan may provide for less than full payment of a DSO assigned to a governmental unit or owed to or recoverable by a governmental unit notwithstanding the priority in § 507(a)(1)(B) if the plan provides for payment of all of the debtor’s projected disposable income for a five-year period.15 A DSO assigned to a governmental unit (other than for collection) or owed directly to or recoverable by a governmental unit that would ordinarily be entitled to the priority in § 507(a)(1)(B) and full payment under § 1322(a)(2) can be paid less than in full if the debtor commits all projected disposable income for five years to payments under the plan.

[15]

Without regard to whether a DSO is a priority claim under § 507(a)(1), there is a new condition for confirmation in § 1325(a)(8) that the debtor has paid all DSOs that first became payable after the petition.16 This means that even a DSO not entitled to priority that need not be paid in full through the plan must still be current with respect to postpetition payments to confirm a plan.17

[16]

There are other new and changed priorities that could affect Chapter 13 plans. BAPCPA increased the (now) fourth priority for wage claims to $10,000 per individual, from its adjusted dollar amount of $4,625.18 On April 1, 2007, that $10,000 amount automatically adjusted again to $10,950. Chapter 13 debtors with employees face priority claims up to $10,950 from each employee—claims that must be paid in full to confirm a plan under § 1322(a)(2).

[17]

BAPCPA rewrote the eighth priority for unsecured claims of governmental units, including claims for income taxes for a taxable year ending before the petition.19 The 240-day prepetition period within which a tax assessment will create a priority tax claim was expanded by BAPCPA to exclude time during which an offer in compromise was pending (plus 30 days) and time during which collection was stayed in any prior bankruptcy case (plus 90 days).20

[18]

In a hanging sentence at the end of § 507(a)(8), BAPCPA somewhat redundantly extended all time periods for the eighth priority for taxes for any time a stay was in effect in a prior bankruptcy case or collection was “precluded by the existence of one or more confirmed plans under this title, plus 90 days.”21 This new provision takes aim at debtors who have used prior bankruptcy cases to stall collection of a tax claim. Pre-BAPCPA case law that fractured with respect to whether a Chapter 13 case tolled the look-back periods for priority of taxes22 is resolved by BAPCPA in favor of statutory extension. This is consistent with the Supreme Court’s decision in Young v. United States.23

[19]

Finally, there is a completely new 10th priority for “allowed claims for death or personal injuries resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug or another substance.”24 This new priority debt is similar but not identical to the nondischargeable debt described in § 523(a)(9). Section 523(a)(9) excepts from discharge a debt for “death or personal injury caused by the debtor’s operation of a motor vehicle, vessel or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug or another substance.” (emphasis added). Debts described in § 523(a)(9) are nondischargeable in a Chapter 13 case.25 When the DWI death or injury was caused by the unlawful operation of an aircraft, the debt is nondischargeable but not entitled to priority. Claims for death or injury resulting from unlawful operation of a car or boat are entitled to priority but are nondischargeable only if caused by the debtor’s DWI. Remember that the 10th priority is entitled to the same full payment as the first priority in a Chapter 13 case.26 After BAPCPA, DWI victims will compete on an equal footing with DSO claimants for full-payment dollars in Chapter 13 cases.

[20]

To summarize the new and changed priority claims, after BAPCPA, Chapter 13 debtors face an enlarged class of DSOs that must be paid in full to confirm a plan. The wage priority has grown in amount. The priority of tax claims does not expire during stays under bankruptcy and nonbankruptcy law. Personal injury and death claims resulting from the debtor’s unlawful operation of a car or boat while intoxicated are entitled to priority and full payment through the Chapter 13 plan. The enlargement of some existing priorities and creation of new ones by BAPCPA portends that Chapter 13 debtors will pay more money to priority claim holders to accomplish confirmation of Chapter 13 plans. This is likely to encourage classification issues.27


 

1  See 11 U.S.C. § 1322(a)(2), discussed in § 98.1 [ Plan Must Provide Full Payment ] § 73.1  Plan Must Provide Full Payment.

 

2  11 U.S.C. § 507(a)(1).

 

3  11 U.S.C. § 101(14A) (emphasis added), discussed in §§ 428.1 [ Domestic Support Obligations: Preconfirmation Rights ] § 57.5  Domestic Support Obligations: Preconfirmation Rights after BAPCPA, 430.1 [ Domestic Support Obligation Exception ] § 58.6  Domestic Support Obligation Exception after BAPCPA, 458.1 [ Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) ] § 88.5  Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA, 498.1 [ Domestic Support Obligations Must Be Current ] § 113.3  Domestic Support Obligations Must Be Current, 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA and 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5).

 

4  11 U.S.C. § 101(14A)(C).

 

5  See § 100.3 [ Secured Priority Claims? ] § 73.7  Secured Priority Claims?.

 

6  See discussion of secured claims beginning at § 74.1  General Rules before BAPCPA.

 

7  See §§ 98.1 [ Plan Must Provide Full Payment ] § 73.1  Plan Must Provide Full Payment and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

8  See In re Reid, No. 06-50147, 2006 WL 2077572, at *2 (Bankr. M.D.N.C. July 19, 2006) (“[W]hile domestic support obligations are technically designated as first priority by § 507(a)(1)(A) and (B), they are subsequently displaced by certain administrative expenses of the trustee in § 507(a)(1)(C).”).

 

9  See §§ 293.1 [ Trustee’s Fees and Expenses ] § 136.4  Trustee’s Fees and Expenses before BAPCPA and 514.1 [ Trustees’ Fees and Expenses ] § 136.5  Trustees’ Fees and Expenses after BAPCPA.

 

10  11 U.S.C. § 507(a)(1)(A), (B).

 

11  See 11 U.S.C. § 1328(a) and (b), discussed in § 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

12  11 U.S.C. § 1322(a)(10), discussed in § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

13  See 11 U.S.C. § 101(14A), discussed above in this section and in §§ 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

14  See § 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

15  11 U.S.C. § 1322(a)(4), discussed in § 458.1 [ Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) ] § 88.5  Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA.

 

16  11 U.S.C. § 1325(a)(8), discussed in § 498.1 [ Domestic Support Obligations Must Be Current ] § 113.3  Domestic Support Obligations Must Be Current.

 

17  This may be an empty set, depending on the outcome of the discussion above about support assigned to a nongovernmental entity.

 

18  11 U.S.C. § 507(a)(4).

 

19  See 11 U.S.C. § 507(a)(8).

 

20  11 U.S.C. § 507(a)(8)(A)(ii).

 

21  Hanging sentence at end of 11 U.S.C. § 507(a)(8).

 

22  See § 292.1 [ Taxes ] § 136.2  Taxes before BAPCPA.

 

23  535 U.S. 43, 122 S. Ct. 1036, 152 L. Ed. 2d 70 (2002). See § 292.1 [ Taxes ] § 136.2  Taxes before BAPCPA.

 

24  11 U.S.C. § 507(a)(10) (emphasis added).

 

25  See 11 U.S.C. § 1328(a)(2), discussed in § 555.1 [ Boating or Flying while Intoxicated: § 523(a)(9) ] § 159.8  Boating or Flying while Intoxicated: § 523(a)(9).

 

26  See 11 U.S.C. § 1322(a)(2), discussed in § 522.1 [ The New DWI Priority ] § 136.22  The Driving or Boating while Intoxicated Priority after BAPCPA.

 

27  See § 460.1 [ New Priority Claims ] § 87.5  Priority Claims after BAPCPA.