§ 88.3     Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10)
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 88.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The payment of nondischargeable claims through Chapter 13 plans raises knotty classification issues under § 1322(b)(1).1 Chapter 13 debtors want to pay nondischargeable claims in full—or as nearly so as possible given available resources—to avoid a surviving debt after discharge. This is particularly true when the nondischargeable claim is accruing postpetition interest that will also be nondischargeable at the completion of payments to other creditors. Most student loans, domestic support obligations (DSOs) and taxes accrue postpetition interest that shares the nondischargeable character of the underlying debt and will bedevil the debtor after discharge if not managed through the Chapter 13 plan.2

[2]

But the separate classification of nondischargeable debt for more favorable treatment through the plan rarely passes the “fair discrimination” test in § 1322(b)(1) when other (dischargeable) unsecured claims are not being paid in full.3 One exception to this general rule is when the nondischargeable claim is also a priority debt that is entitled by § 1322(a)(2) to full payment through the Chapter 13 plan—a DSO, for example.4 Even with respect to priority debt that is nondischargeable, debtors have had trouble convincing bankruptcy courts that it is fair discrimination under § 1322(b)(1) to pay postpetition interest when other unsecured claim holders are not getting postpetition interest.

[3]

BAPCPA takes a small step toward allowing Chapter 13 debtors to pay postpetition interest to the holders of nondischargeable claims in new § 1322(b)(10), which states that a Chapter 13 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), except that such interest may be paid 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.5
[4]

New § 1322(b)(10) permits the Chapter 13 plan to pay postpetition interest on unsecured claims that are nondischargeable under § 1328(a) “to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims.”6 This amendment was contained in a section of BAPCPA that dealt with DSOs,7 suggesting that the permission to pay postpetition interest was targeted at nondischargeable DSOs. However, new § 1322(b)(10) is not limited to DSOs, and there is nothing in House Report No. 109-31 to suggest any limitation other than that the debt is nondischargeable.

[5]

New § 1322(b)(10) conditions the payment of postpetition interest on full payment of “all allowed claims.” These words are not limited to allowed unsecured claims. Accordingly, full payment of allowed secured claims, priority claims (whether secured or unsecured) and general unsecured claims must be provided before the plan can also pay postpetition interest to the holder of a nondischargeable claim.

[6]

BAPCPA substantially expanded the list of debts that are nondischargeable at the completion of payments in a Chapter 13 case.8 Claims that are nondischargeable under § 1328(a) include long-term debts,9 tax claims,10 debts for misrepresentation and fraud,11 unscheduled debts,12 debts for fraud or defalcation in a fiduciary capacity,13 DSOs,14 student loans,15 claims for personal injury or death caused by driving, boating or flying while intoxicated,16 restitution or criminal fine based on conviction of a crime17 and restitution or damages awarded in a civil action based on willful or malicious injury or death.18 This expanded list means new incentives for Chapter 13 debtors to separately classify nondischargeable claims for more favorable treatment, including the payment of postpetition interest through the plan.

[7]

“Disposable income” in new § 1322(b)(10) refers to the test for confirmation in § 1325(b).19 Ordinarily the disposable income test in § 1325(b) is only applicable upon an objection to confirmation from the Chapter 13 trustee or from the holder of an allowed unsecured claim. Even in the absence of such an objection, § 1322(b)(10) requires some examination of disposable income when the plan proposes to pay postpetition interest to a nondischargeable claim holder.

[8]

Interest accruing after the petition on an unsecured claim is ordinarily not allowable in a bankruptcy case under § 502(b)(2). New § 1322(b)(10) does not address whether accruing postpetition interest is or must be allowable under § 502. The new section simply states somewhat unequivocally that a Chapter 13 plan can provide for payment of postpetition interest when there is disposable income available after full payment of all allowed claims.

[9]

The “full payment” predicate does not include present value language of the sort found elsewhere in the Bankruptcy Code.20 Full payment of allowed claims for § 1322(b)(10) purposes does not require payment of postpetition interest to all allowed claim holders.

[10]

New § 1322(b)(10) does not address whether a Chapter 13 plan can pay postpetition interest to a dischargeable unsecured claim holder. For example, there has long been debate whether a Chapter 13 plan can pay postpetition interest to the holder of a co-signed claim to protect the cosigner from collection of accruing postpetition interest.21 By negative implication, the specific new provision for payment of postpetition interest to the holders of nondischargeable claims might be interpreted as unfavorable comment on the payment of postpetition interest to dischargeable unsecured claim holders. The same inference could arise in connection with pension loans after BAPCPA.22

[11]

It is not clear whether “full payment of all allowed claims” includes other treatments that are allowed by the Bankruptcy Code. For example, § 1322(b)(5) permits a Chapter 13 debtor to cure default and maintain payments with respect to any long-term secured or unsecured debt.23 Long-term treatment typically does not result in “full payment” in the sense that the entire underlying debt will not be paid off during the life of the plan, only the portion that becomes due during the plan. Would long-term treatment constitute “full payment” to permit separate classification of a nondischargeable claim for payment of postpetition interest? If long- term treatment does not satisfy the full-payment predicate in § 1322(b)(10), no Chapter 13 plan that cures default and maintains payment on a long-term home mortgage would be eligible for payment of postpetition interest to nondischargeable claim holders under new § 1322(b)(10).

[12]

New § 1322(b)(10) also leaves unresolved whether payment of postpetition interest to the holder of a nondischargeable unsecured claim will be fair discrimination when dischargeable unsecured claims are paid in full but without interest. Unlike the new provision for special treatment of DSOs assigned or payable to a governmental entity in § 1322(a)(4),24 the new permissive power to pay postpetition interest to nondischargeable claim holders is in subpart (b) of § 1322. Elsewhere in subpart (b), § 1322(b)(1) permits a Chapter 13 debtor to classify unsecured claims but prohibits unfair discrimination against any class.25 Without a statutory exception, separate classification of nondischargeable claims for payment of postpetition interest under new § 1322(b)(10) may be subject to the unfair discrimination test in § 1322(b)(1).

[13]

For example, claims for personal injury or death caused by a Chapter 13 debtor’s driving (boating, flying) while intoxicated are nondischargeable under § 1328(a)(2), as amended by BAPCPA.26 Under new § 1322(b)(10), a Chapter 13 plan could pay postpetition interest to the holder of a nondischargeable DWI claim if the plan provides full payment of other unsecured claim holders but without postpetition interest. It can be anticipated that the trustee or a general unsecured claim holder will object on the ground that the payment of postpetition interest to the DWI claimant is unfair discrimination. A majority of student loan cases before BAPCPA held that it is unfair discrimination to pay a nondischargeable student loan more favorably than other dischargeable unsecured claims.27 New § 1322(b)(10) approves a special treatment for all nondischargeable debts, including student loans, but without an exception to § 1322(b)(1), we are left with uncertainty whether paying postpetition interest will be considered fair discrimination.

[14]

New § 1322(b)(10) could create some confusion for nondischargeable claims that are also entitled to priority and full payment in a Chapter 13 case. Under § 1322(a)(2), a Chapter 13 plan must provide for full payment of all claims entitled to priority under § 507 unless the claim holder agrees to different treatment.28 Some priority claims—in particular, DSOs—are also nondischargeable under § 1328(a) in a Chapter 13 case.29 Debts that are (only) priority must be paid in full under § 1322(a)(2), but postpetition interest is not part of the entitlement.30 Heretofore, a Chapter 13 debtor could pay a priority DSO or tax claim in full through a Chapter 13 plan even when other unsecured claim holders were not being paid in full, but Chapter 13 plans could not pay postpetition interest to the priority claim holder without running into the unfair discrimination standard in § 1322(b)(1).31 New § 1322(b)(10) could change this outcome—at least when the debtor has disposable income after full payment of all claims—if the new section is interpreted to satisfy or to be an exception to the unfair discrimination test.

[15]

BAPCPA throws another twist into this analysis with respect to DSOs. DSO is broadly defined by BAPCPA to include interest that accrues on the debt under applicable nonbankruptcy law “notwithstanding any other provision of this title.”32 Full payment of a priority DSO under § 1322(a)(2) may be interpreted to include payment of postpetition interest after BAPCPA.

[16]

But notice that a DSO is also nondischargeable in a Chapter 13 case under § 1328(a)(2), which incorporates § 523(a)(5).33 New § 1322(b)(10) states that a Chapter 13 plan is permitted to pay postpetition interest to the holder of a nondischargeable claim only if there is disposable income available after provision for full payment of all allowed claims. New § 1322(b)(10) may be construed as a limit on the payment of postpetition interest to a claim that is nondischargeable in a Chapter 13 case, without regard to the kind of claim.

[17]

There does appear to be a “better” interpretation here. A priority and nondischargeable claim would be eligible for full payment under § 1322(a)(2) without regard to whether all allowed claims are paid in full for purposes of § 1322(b)(10). This outcome follows from the first sentence of § 1322(b) which provides that the permissive powers in § 1322(b)—including the new power to pay postpetition interest to nondischargeable claim holders in § 1322(b)(10)—are “subject to subsections (a) and (c).”34 A priority DSO claim that includes postpetition interest “notwithstanding any other provision of this title” can be paid in full with its postpetition interest component without regard to the limitations in new § 1322(b)(10). Nondischargeable debts other than DSOs—without regard to priority—would have to satisfy the conditions in new § 1322(b)(10) and, perhaps, the unfair discrimination test in § 1322(b)(1) to be eligible for payment of postpetition interest.

[18]

There are likely to be several different outcomes after BAPCPA with respect to separate classification and payment of postpetition interest for claims that are priority, nondischargeable or both. DSOs get the ultimate special treatment. A priority DSO is entitled to full payment without postpetition interest under § 1322(a)(2); because it is also nondischargeable, a DSO ordinarily would be entitled to postpetition interest only if all allowed claims were paid in full under § 1322(b)(10); but because of the special definition of DSO in new § 101(14A), a DSO gets full payment that includes postpetition interest without regard to whether other allowed claims are paid in full. A priority claim that is also nondischargeable that is not specially defined to include postpetition interest—for example, an allowed claim for death or personal injury resulting from/caused by the operation of a motor vehicle or boat when the debtor was intoxicated35—could be separately classified for full payment under § 1322(a)(2) but would be eligible for postpetition interest only if the debtor has disposable income available after making provision for full payment of all allowed claims consistent with new § 1322(b)(10). There will also be claims that are nondischargeable but not entitled to priority—for example, a fraud claim under §§ 523(a)(2) and 1328(a)(2)36—which could be separately classified for full payment only by passing the unfair discrimination test, and could be paid postpetition interest only by satisfying the additional conditions in new § 1322(b)(10). These tests are cumulative—it could be unfair discrimination to pay postpetition interest to a nondischargeable, nonpriority claim holder when other unsecured claims are not being paid postpetition interest, even when there is disposable income available after providing full payment for all allowed claims.

[19]

There is the final special case of a DSO assigned to or payable to a governmental unit.37 Under § 507(a)(1)(B), a DSO assigned to or payable to a governmental unit is typically a priority debt entitled to full payment in a Chapter 13 case under § 1322(a)(2).38 Because of the expansive definition of DSO in new § 101(14A), the DSO claim includes accruing postpetition interest that would be payable in full as well under § 1322(a)(2).

[20]

Under new § 1322(a)(4), a Chapter 13 plan may provide for less than full payment of a DSO claim that is assigned or payable to a governmental unit under § 507(a)(1)(B), but only if the plan provides that all of the debtor’s projected disposable income for five years is applied to payments under the plan.39 A DSO assigned or payable to a governmental unit is also a nondischargeable claim under § 1328(a)(2) and is subject to the permissive power in new § 1322(b)(10) that the plan can provide for the payment of interest accruing after the petition only if the debtor has disposable income available after provision for payment in full of all allowed claims.

[21]

Although other interpretations are possible, the mandatory/permissive power in new § 1322(a)(4) probably trumps the more limited permissive power in § 1322(b)(10) with this result: a Chapter 13 plan can provide for payment in full or less than payment in full of a DSO assigned or payable to a governmental unit if all of the debtor’s projected disposable income for a five-year period is applied to make payments—without regard to the fairness of discrimination and without regard to the availability of disposable income after provision for payment (or not) of unsecured claims—and payment of the DSO can include interest that accrues after the petition.40

[22]

New § 1322(b)(10) will be of limited use to Chapter 13 debtors because of the predicate that postpetition interest is payable on account of a nondischargeable claim only if the debtor has disposable income available after full payment of all allowed claims. Except with respect to DSOs after BAPCPA, Chapter 13 debtors still face the unfair discrimination barrier to separate classifications that include payment of postpetition interest—even when the conditions in new § 1322(b)(10) can be satisfied.


 

1  See discussion beginning at § 88.1  In General.

 

2  See §§ 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support, 346.1 [ Student Loans ] § 158.2  Student Loans and 349.1 [ Claims Not Provided for by the Plan or Disallowed under § 502 ] § 158.5  Claims Not Provided for by the Plan or Disallowed under § 502.

 

3  See discussion beginning at § 88.1  In General.

 

4  See §§ 152.2 [ Alimony, Maintenance and Support ] § 88.4  Alimony, Maintenance and Support, 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by 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 and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

5  11 U.S.C. § 1322(b)(10). See also § 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.

 

6  11 U.S.C. § 1322(b)(10).

 

7  See Pub. L. No. 109-8, § 213, 119 Stat. 23 (2005).

 

8  See discussion beginning at § 159.1  Taxes.

 

9  11 U.S.C. § 1328(a)(1), discussed in §§ 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts and 351.1 [ Long-Term Debts ] § 158.7  Long-Term Debts.

 

10  11 U.S.C. § 1328(a)(2), discussed in § 548.1 [ Taxes ] § 159.1  Taxes.

 

11  11 U.S.C. § 1328(a)(2), discussed in § 549.1 [ False Representations and Fraud: § 523(a)(2) ] § 159.2  False Representations and Fraud: § 523(a)(2).

 

12  11 U.S.C. § 1328(a)(2), discussed in § 551.1 [ Unscheduled Creditors: § 523(a)(3) ] § 159.4  Unscheduled Creditors: § 523(a)(3).

 

13  11 U.S.C. § 1328(a)(2), discussed in § 550.1 [ Fraud and Defalcation: § 523(a)(4) ] § 159.3  Fraud and Defalcation: § 523(a)(4).

 

14  11 U.S.C. § 1328(a)(2), discussed in §§ 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support and 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5).

 

15  11 U.S.C. § 1328(a)(2), discussed in §§ 346.1 [ Student Loans ] § 158.2  Student Loans and 553.1 [ Student Loans: § 523(a)(8) ] § 159.6  Student Loans: § 523(a)(8).

 

16  11 U.S.C. § 1328(a)(2), discussed in §§ 347.1 [ Driving While Intoxicated ] § 158.3  Driving while Intoxicated and 555.1 [ Boating or Flying while Intoxicated: § 523(a)(9) ] § 159.8  Boating or Flying while Intoxicated: § 523(a)(9).

 

17  11 U.S.C. § 1328(a)(3), discussed in § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

18  11 U.S.C. § 1328(a)(4), discussed in § 554.1 [ Willful or Malicious Injury: § 1328(a)(4) ] § 159.7  Willful or Malicious Injury: § 1328(a)(4).

 

19  See discussion of projected disposable income test beginning at § 92.1  In General.

 

20  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.

 

21  See § 150.1 [ Co-signed Debts ] § 87.3  Co-signed Debts.

 

22  See 11 U.S.C. § 1322(f), discussed in § 461.1 [ Pension Loan Repayment: New § 1322(f) ] § 87.6  Pension Loan Repayment: § 1322(f) after BAPCPA.

 

23  See 11 U.S.C. § 1322(b)(5), discussed in §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations, 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home and 171.1 [ Curing Default and Maintaining Payments on Unsecured Debt ] § 101.4  Curing Default and Maintaining Payments on Unsecured Debt.

 

24  See 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.

 

25  11 U.S.C. § 1322(b)(1), discussed in § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

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

 

27  See §§ 153.1 [ Student Loans ] § 88.6  Student Loans and 553.1 [ Student Loans: § 523(a)(8) ] § 159.6  Student Loans: § 523(a)(8).

 

28  11 U.S.C. § 1322(a)(2), discussed in § 151.1 [ Priority Claims ] § 87.4  Priority Claims.

 

29  See 11 U.S.C. §§ 101(14A), 1322(a)(2) and 1328(a)(2), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by 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, 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).

 

30  See §§ 100.2 [ Interest Not Required, with Exceptions ] § 73.5  Interest Not Required, with Exceptions and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

31  See § 151.1 [ Priority Claims ] § 87.4  Priority Claims.

 

32  11 U.S.C. § 101(14A), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

33  See 11 U.S.C. § 1328(a)(2), discussed in § 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5).

 

34  11 U.S.C. § 1322(b).

 

35  See 11 U.S.C. §§ 507(a)(10), 523(a)(9) and 1328(a)(2), discussed in §§ 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).

 

36  See 11 U.S.C. §§ 523(a)(2) and 1328(a)(2), discussed in § 549.1 [ False Representations and Fraud: § 523(a)(2) ] § 159.2  False Representations and Fraud: § 523(a)(2).

 

37  See also § 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.

 

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

 

39  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.

 

40  See § 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.