§ 73.5     Interest Not Required, with Exceptions
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 73.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Section 1322(a)(2) requires that the plan “provide for the full payment, in deferred cash payments, of all claims entitled to priority under § 507.” The section does not contain the magic words, “as of the effective date of the plan,” that would entitle priority claim holders to “present value.”1 Thus, the courts have concluded that Chapter 13 debtors are not required to pay interest to priority claim holders on deferred payments through the plan.2

[2]

This is sometimes a significant financial advantage to debtors. For example, outside bankruptcy a tax debt would continue to accrue interest and sometimes penalties. In Chapter 13, the debtor must pay priority taxes in full, but interest stops at the date of the petition.

[3]

Other times, this advantage is only temporal. If the priority debt is nondischargeable, the debtor may be able to pay the debt without interest during the years of the plan, but the accruing interest will remain a personal obligation after the completion of payments to other creditors.3 After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),4 some tax debts, domestic support obligations and drunk driving claims are priority, entitled to full payment without interest, and nondischargeable.5 There is the possibility after BAPCPA that some debtors will have sufficient income to pay postpetition interest on a priority, nondischargeable claim under 11 U.S.C. § 1322(b)(10).6

[4]

Prior to BAPCPA, an exception to the rule of no interest to priority claim holders in Chapter 13 cases was the possibility that interest would be payable to the holder of an allowed secured claim for alimony, maintenance or support described in former § 507(a)(7), in a Chapter 13 case filed after October 22, 1994, in which the debtor paid the claim over time through the plan under § 1325(a)(5).7 A secured priority claim for alimony or support derived an entitlement to interest from the present value language in § 1325(a)(5), not from § 1322(a)(2).8 BAPCPA eliminated the possibility of a domestic support obligation that was both secured and entitled to priority.9

[5]

The general rule of payment in full of priority claims without postpetition interest has important new exceptions after BAPCPA. The largest exception is probably domestic support obligations in Chapter 13 cases filed on or after October 17, 2005. Detailed elsewhere,10 domestic support obligation as defined by BAPCPA in § 101(14A) includes “interest that accrues on that debt . . . under applicable nonbankruptcy law notwithstanding any other provision of this title.”11 After BAPCPA, domestic support obligations are a special class of claim that includes accruing postpetition interest. The full-payment mandate in § 1322(a)(2) could be interpreted to include any postpetition interest that accrues as part of a domestic support obligation claim.12

[6]

A second exception to the general rule that priority claims are paid in full without interest is the permissive power added by BAPCPA to § 1322(b)(10) that the plan can provide for the payment of interest “accruing after the date of the filing of the petition on unsecured claims that are nondischargeable under section 1328(a), . . . only to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims.”13 Unsecured claims that are nondischargeable and entitled to priority would include domestic support obligations,14 some drunk driving claims,15 and some tax debts—for example, withholding taxes entitled to priority under § 507(a)(8)(C) and unfiled, fraudulently filed or willfully evaded taxes described in § 523(a)(1)(B) and (C).16 Debts that are both priority and nondischargeable would be eligible for postpetition interest when there is available disposable income as described in new § 1322(b)(10). Because this power to pay postpetition interest is permissive only, it is not part of the mandate for full payment of priority claims under § 1322(a)(2); but because these debts are nondischargeable, paying postpetition interest will often be in the debtor’s best interest whenever there is sufficient income to do so.

[7]

Finally, there may be a class of administrative expenses that would be entitled to priority and postpetition interest. Administrative expense tax claims may fall in this category.


 

1  See § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

2  See § 299.1 [ Postpetition Interest on Priority Claims ] § 136.16  Postpetition Interest on Priority Claims before BAPCPA. See, e.g., In re Messinger, 241 B.R. 697 (Bankr. D. Idaho Oct. 22, 1999) (Myers) (Prepetition child support judgment is a priority claim under § 507(a)(7) entitled to full payment under § 1322(a)(2), but full payment does not require payment of postpetition interest.); In re Pitt, 240 B.R. 908 (Bankr. N.D. Cal. Oct. 14, 1999) (Weissbrodt) (Plan need not pay postpetition interest to holders of priority support claims to accomplish confirmation.); In re Dorf, 219 B.R. 498, 501 n.3 (Bankr. N.D. Ill. Mar. 12, 1998) (Schmetterer) (“‘Full payment’ of a claim under § 1322(a)(1) [sic] does not include post-petition interest.”). Compare Mudd v. Jacobson (In re Jacobson), 231 B.R. 763 (Bankr. D. Ariz. Mar. 12, 1999) (Case) (Although § 1322(a)(2) does not require the payment of postpetition interest on a nondischargeable priority claim for child support, to avoid relief from the stay, plan must vest in the debtor postconfirmation income sufficient to allow the child support creditor to collect postpetition interest.).

 

3  See §§ 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support, 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA, 548.1 [ Taxes ] § 159.1  Taxes and 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5). See, e.g., Fort v. Florida Dep’t of Revenue (In re Fort), 412 B.R. 840 (Bankr. W.D. Va. June 30, 2009) (Stone) (After BAPCPA, interest accrues postpetition on support obligation owing to state of Florida; debtors agreed that postpetition interest was due notwithstanding that confirmed plan did not provide for payment of interest.); In re Messinger, 241 B.R. 697 (Bankr. D. Idaho Oct. 22, 1999) (Myers) (Accruing but unpaid postpetition interest on a priority claim for prepetition child support will be nondischargeable at the completion of payments under the plan.); In re Pitt, 240 B.R. 908 (Bankr. N.D. Cal. Oct. 14, 1999) (Weissbrodt) (The full-payment requirement in § 1322(a)(2) does not discharge the accruing postpetition interest; plan is not confirmable that purports to discharge interest on a priority support claim without payment through the plan.).

 

4  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

5  See below in this section, and see §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA, 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10), 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA, 520.1 [ Postpetition Interest on Priority Claims ] § 136.17  Postpetition Interest on Priority Claims after BAPCPA, 522.1 [ The New DWI Priority ] § 136.22  The Driving or Boating while Intoxicated Priority after BAPCPA, 548.1 [ Taxes ] § 159.1  Taxes and 555.1 [ Boating or Flying while Intoxicated: § 523(a)(9) ] § 159.8  Boating or Flying while Intoxicated: § 523(a)(9).

 

6  See below in this section, and see §§ 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA, 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10) and 520.1 [ Postpetition Interest on Priority Claims ] § 136.17  Postpetition Interest on Priority Claims after BAPCPA.

 

7  See also §§ 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest, 299.1 [ Postpetition Interest on Priority Claims ] § 136.16  Postpetition Interest on Priority Claims before BAPCPA and 300.1 [ Secured Priority Claims? ] § 136.18  Secured Priority Claims before BAPCPA.

 

8  See § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

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

 

10  See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 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.

 

11  11 U.S.C. § 101(14A), as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

12  See §§ 299.1 [ Postpetition Interest on Priority Claims ] § 136.16  Postpetition Interest on Priority Claims before BAPCPA, 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.

 

13  11 U.S.C. § 1322(b)(10), as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), discussed in §§ 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10) and 520.1 [ Postpetition Interest on Priority Claims ] § 136.17  Postpetition Interest on Priority Claims after BAPCPA.

 

14  See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 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).

 

15  See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 522.1 [ The New DWI Priority ] § 136.22  The Driving or Boating while Intoxicated Priority after BAPCPA and 555.1 [ Boating or Flying while Intoxicated: § 523(a)(9) ] § 159.8  Boating or Flying while Intoxicated: § 523(a)(9).

 

16  See §§ 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA and 548.1 [ Taxes ] § 159.1  Taxes.