§ 113.7 — Order of Payments to Creditors before BAPCPA
Revised: June 7, 2004
The Chapter 13 debtor has much control over the order of payments to creditors. 11 U.S.C. § 1322(b)(4) allows the debtor to “provide for payments on any unsecured claim . . . concurrently with payments on any secured claim or any other unsecured claim.”1 This broad statutory authority gives debtors flexibility to design payment protocols that match the needs of individual cases.2
For example, the debtor can propose to pay a secured claim holder more quickly than unsecured claim holders.3 This is advantageous to the debtor because secured claim holders typically are entitled to interest on deferred payments through the plan.4 Retirement of secured claims in advance of unsecured claims saves the debtor money and ultimately increases the funds available for other creditors. Chapter 13 debtors rarely have enough income to pay secured and unsecured claim holders at the same time. Paying secured claim holders first allows the debtor to continue to use collateral that is subject to liens without impairing the lienholder’s collateral. Often the collateral is a car or appliances that are necessary to maintain the debtor’s household and ability to fund the plan. Also, from the debtor’s standpoint, paying secured claims first best positions the debtor if the plan fails and conversion results.5
It has been held that the Chapter 13 trustee cannot force a debtor to pay secured and unsecured claims in any particular order. In In re Baines,6 in several consolidated Chapter 13 cases, confirmed and unconfirmed plans provided that lawsuit proceeds and workers’ compensation benefits would be paid to the trustee. The trustee received proceeds and moved for “special distribution” orders to pay the proceeds only to unsecured creditors. Citing § 1322(b)(4), the bankruptcy court held that a Chapter 13 debtor’s discretion to pay unsecured and secured creditors “contemporaneously” included the option to “satisfy his secured creditors first.” The court characterized this “tactic” as “entirely acceptable under the Code.” The bankruptcy court then explained that the trustee could not invade the debtor’s discretion with respect to the order of payments to creditors either before or after confirmation of a plan:
Neither the trustee nor any unsecured creditor can compel a Chapter 13 debtor to exercise his Section 1322(b)(4) option. For that reason alone, the Trustee cannot force the Lehrs to modify their as-yet unconfirmed plan to provide for the contemporaneous payment of both their secured and unsecured creditors. It stands to reason, then, that the Trustee cannot force either Baines or Harris to reorder their distribution scheme upon an increase in their disposable income during the life of their confirmed plans. . . . [T]he Trustee may not force the Debtors to do, through modification, what he cannot force them to do at plan confirmation. . . . [T]he possibility in the present case that unsecured creditors will never recover any distribution from the subject proceeds is not unusual, nor given the structure and purpose of the Code, inequitable. . . . The Court is not without sympathy for unsecured creditors. However, from the Court’s perspective, Chapter 13 is the best-case scenario for them in that it at least offers some hope of payment . . . . But given its voluntary nature, this hope is not a guarantee.7
The basic premise in Baines—that, within the limits of the various tests for confirmation, the Chapter 13 debtor determines the order of payments to creditors—is supported by § 1322(b)(4). Before confirmation, there is nothing in § 1323 to suggest that the trustee or creditors can force a change in the debtor’s proposed allocation of payments among secured and unsecured creditors.8 It is not so clear that the same can be said after confirmation. As detailed elsewhere,9 § 1329 probably empowers the trustee and allowed unsecured claim holders to seek modification of a confirmed plan to adjust distributions among classes of creditors. Also, some substantive objections to confirmation have the effect on distributions refused in Baines—for example, an objection to “accelerated” payment of a secured claim may increase the disposable income available for unsecured claim holders.10
Chapter 13 debtors can use § 1322(b)(4) to pay priority claims in advance of other claims.11 Priority claims are entitled to payment in full during the plan, but deferred payment is specifically authorized by § 1322(a)(2).12 Chapter 13 does not require that priority claim holders be paid in any particular order relative to other claim holders.13 In many jurisdictions, attorneys’ fees are treated the same as priority claims and are paid on a preferred basis in advance of some or all other claims.14
11 U.S.C. § 1326(b)(1) provides that “any unpaid claim of the kind specified in § 507(a)(1)” shall be paid in a Chapter 13 case “[b]efore or at the time of each payment to creditors under the plan.”15 Although § 507(a)(1) deals with administrative expenses and other charges, it is reasonably inferable that administrative expenses allowed under § 503 and defined as first priority by § 507(a)(1) are claims for purposes of § 1326(b)(1).
It has been held that § 1326(b)(1) requires the payment of attorneys’ fees before or contemporaneously with payments to other creditors,16 and if early payment of attorneys’ fees would interfere with feasibility of the plan, then the bankruptcy court should deny confirmation.17 Another court interpreted § 1326(b)(1) to permit the payment of attorneys’ fees either before or concurrently with other claims, so long as the payment of attorneys’ fees begins no later than the first payment to creditors.18 Under this view, when payments into the plan are small and early payment of attorneys’ fees would delay payments to creditors, the debtor can spread out payment of attorneys’ fees over several months after confirmation to accommodate payments to other creditors.19 In a jurisdiction that delays confirmation until after the claims bar date,20 one court interpreted § 1326(b) to require concurrent distribution to secured claim holders and to administrative expenses of the money accumulated before confirmation notwithstanding that the result may be some impairment of the adequate protection paid by the debtor to the trustee before confirmation.21
Discussed in more detail elsewhere,22 debtors sometimes want to designate the order in which tax claims are paid through a plan. Among tax claims entitled to the same priority of payment under §§ 507(a) and 1322(a)(2), some taxes may be nondischargeable personal liabilities of the debtor while others are dischargeable upon completion of payments under the plan. Citing the Supreme Court’s opinion in United States v. Energy Resources Co.,23 Chapter 13 debtors have had little success requiring the IRS to allocate tax payments in any specified order.24
One court invoked a “common law rule” to help debtors force the application of payments by a creditor in a particular order. In In re Zersen,25 the debtors had a note secured by their homestead and a separate “business note” at the same bank. The documentation was ambiguous whether the homestead secured both notes. The note to acquire the homestead was co-signed by the debtor’s wife’s parents. The proposed plan required the bank to apply payments to the co-signed homestead note rather than to the separate business note. The plan was confirmed over the bank’s objections:
[T]he issue of the debtors’ right to direct application of payments under the plan is controlled by the general rule that the creditor must do as the debtor directs. . . . If a debtor may direct which debts are paid at common law, there does not appear to be any reason for holding that the bankruptcy code somehow interferes with this right. . . . 11 U.S.C. § 1322(b)(10) is identical to § 1123(b)(5), and provides that the court may approve any provision in a chapter 13 plan which is not inconsistent with the other provisions of the bankruptcy code. Clearly, there is nothing about the debtors’ intent to allocate payments to the cosigned debt which is inconsistent with the code. Instead, it is contemplated by § 1301 and it is authorized by state law. Further, a similar directive was approved in [United States v. Energy Resources, 495 U.S. 545, 110 S. Ct. 2139, 109 L. Ed. 2d 580 (1990)]. There is simply no reason to deny the debtors the right to allocate payments as they see fit within the parameters of the code and applicable state law if the allocation is necessary to effectuate the debtors’ reorganization plan.26
The common-law right of a borrower to direct application of payments discussed in Zersen is tempered in a Chapter 13 case by the unfair-discrimination standard in § 1322(b)(1).27 Any proposal by a Chapter 13 debtor to pay one claim of a creditor in advance of another claim owed that same creditor may be a separate classification measured against the unfair-discrimination standard in § 1322(b)(1). The common-law argument accepted by the court in Zersen is intriguing but begs the underlying question whether the proposed discrimination in the order of payments is fair.
Section 1326 suggests a sort of payment priority for fees payable to a standing Chapter 13 trustee. 11 U.S.C. § 1326(b)(2) provides that the percentage fee for a standing trustee under 28 U.S.C. § 586(e)(1)(B)28 “shall be paid” “[b]efore or at the same time of each payment to creditors under the plan.” The reference to § 507(a)(1) in § 1326(b)(1) is some evidence that the percentage fee for a standing trustee in § 1326(b)(2) is not an administrative expense or a priority claim under § 507(a)(1),29 but the trustee’s percentage fee is collectible even before payments to ordinary creditors under the plan.
When the Chapter 13 debtor assumes a lease or executory contract that is in default,30 the debtor may need § 1322(b)(4) to satisfy the lessor’s rights under § 365. As discussed above,31 § 365(b) requires the debtor to promptly cure defaults upon assumption of a lease or executory contract. To promptly cure defaults, the plan will need to pay the prepetition default more quickly than other unsecured claims. This classification of claims must satisfy the unfair-discrimination test in § 1322(b)(1).32
To construct the order of payments, debtors must be careful not to prefer in a manner that threatens the retention of liens by secured claim holders.33 For example, one court denied confirmation of a plan that proposed to pay administrative expenses and priority claims in advance of secured claims when the collateral would substantially depreciate before the payments to secured claim holders began.34 In In re Cook,35 the bankruptcy court acknowledged that § 1326(b) permits the payment of administrative expenses before or at the same time as payments to secured creditors; however,
a plan can not be confirmed over objection unless it provides that, upon confirmation, each secured creditor will receive a payment at least equal to the amount of depreciation over the relevant time period. . . . If this cannot be accomplished while also allowing attorney’s fees to be paid in full before commencement of payments to secured creditors, the debtor will be faced with a choice between paying attorney’s fees over a longer period of time under the plan on the one hand, and dismissal or conversion on the other.36
The bankruptcy and district courts in the Eastern District of Michigan have explored the limits of §§ 1326(b) and 1322(b)(4) in a series of opinions evaluating plans that terrace the payment of attorney fees and secured claims. In In re Moses,37 the plan paid attorney fees in full before secured claims, producing a one-month delay in distributions to lienholders. A car lender objected, and the Bankruptcy Court for the Eastern District of Michigan approved the arrangement:
Here, the delay in payments by the chapter 13 Trustee to DaimlerChrysler is one month. In these circumstances, the Court is not persuaded that there exists any requirement for adequate protection of any kind to DaimlerChrysler in addition to the treatment required for DaimlerChrysler’s secured claim under § 1325(a)(5)(B) of the Bankruptcy Code. . . . By providing for payment of the Debtor’s attorney’s fees before any distribution is made to DaimlerChrysler under the plan, the Debtor’s plan conforms to § 1326(b)(1). . . . [I]t mandates that administrative expenses be paid before or at the time of any payments to creditors under the plan.38
Pushing a little harder, the plan in In re Meadows39 provided, “For 30 days following the entry of the Order Confirming Plan, the Trustee shall hold from distribution the sum of $2,000.00 as a fund for the payment of the attorney fees and costs that shall be determined by the court.”40 The Chapter 13 trustee objected because creation of the reserve for attorney fees would delay payments to creditors for approximately 60 days. The Bankruptcy Court for the Eastern District of Michigan found the potential 60-day delay was okay:
A fee reserve is a reasonable way of effectuating the priority scheme imposed by the Code. . . . [S]ection 1326(b) permits the payment of attorney fees either before or simultaneously with payments to creditors. . . . [P]ayment of attorney fees prior to distribution to other creditors is not improper, it is expressly permitted under the Code. . . . [I]n most cases, the maximum period the Trustee will have to hold funds in reserve is for sixty days after confirmation. . . . A reservation of fees clause . . . represents a careful balancing of interests. . . . However, in cases where the amount requested to be reserved is out of line with the services performed, or would cause many months of delay in the distribution to creditors, the scale tips in favor of creditors, and an Objection to Confirmation is appropriate.41
In contrast to Moses and Meadows, the confirmed plan in Holmes v. Chrysler Finance Co. (In re Holmes)42 provided that a car lender would receive payments in advance of administrative expenses. After confirmation, an order awarding attorney fees and expenses to debtor’s counsel recited that fees and expenses were “awarded herein from the funds which first become available.” The District Court for the Eastern District of Michigan held that the order for fees did not modify the confirmed plan because it would be inappropriate to withhold distribution to Chrysler in favor of debtor’s counsel.
In another variation on the theme, in In re Stewart,43 the plan separately classified home mortgage claims to be paid in advance of other secured debt. A car lender objected. The Bankruptcy Court for the Eastern District of Michigan concluded that the Bankruptcy Code empowered Chapter 13 plans to pay some secured claims ahead of others:
[Section] 1322(a)(3) provides that, if the plan classifies claims, it must provide the same treatment for each claim within a particular class. . . . There is no provision which prohibits a debtor from separately classifying secured creditors. . . . [S]eparately classifying secured vehicle claims and home mortgage claims does not violate the Code, and indeed is necessary because such claims simply cannot legally be provided the same treatment. . . . [T]he Code does not require, or even permit, the plan to treat all secured claims the same.44
In this group of cases from the Eastern District of Michigan, Stewart is perhaps the odd man out. It is certainly true that the Bankruptcy Code permits separate classification of each allowed secured claim.45 But why payment of a home mortgage ahead of a lien on a car? Assuming facts not in evidence—that the car is depreciating and the house isn’t—good arguments can be made that the lien retention requirement in § 1325(a)(5)(B)(i) requires distributions on account of the car lien more promptly and regularly than payments on the home mortgage.46 That the debtor has discretion under § 1322(b)(4) to pay some secured claim holders ahead of others does not answer the question whether paying the home mortgage first impairs the lien of a car lender waiting in line.
Moving South, the Bankruptcy Court for the Southern District of Alabama makes an important point in In re Abrams47 about plans that pay one secured claim holder before another. In Abrams, the confirmed plan acknowledged that Nuvell was secured, but the plan made no specific provision for a monthly payment or for present value.48 Nuvell did not object to confirmation. Wells Fargo, another secured claim holder, did object to confirmation and negotiated a “preference payment” of $426.23 per month with postconfirmation interest at 18 percent. After confirmation, just what you are thinking happened: Wells Fargo received essentially all of the distributions under the plan and Nuvell got nothing. Seven months after confirmation, Nuvell woke up and moved for relief from the confirmation order.
The bankruptcy court in Abrams first explained that “a ‘preference’ is a payment of a specified amount each month to a secured creditor. That payment is made before all other distributions, except payments upon priority debts.”49 The Chapter 13 trustee’s practice in the district was to pay priority claims first, then preference claims and after preference claims, other secured claims “pro rata” but without a preferential monthly amount. The bankruptcy court found this arrangement ambiguous because but for the preference payment to Wells Fargo, Wells Fargo and Nuvell would be paid pro rata. Then an important point about notice emerged:
Nuvell had no way of knowing that it would be paid after Wells Fargo. The amendment that gave Wells Fargo a preference, based upon the manner in which payments are made, should have been noticed to all creditors, particularly Nuvell, because it adversely affected Nuvell. . . . Nuvell should be able to object to the treatment of Wells Fargo and to seek amendment to its own treatment in this case.50
Abrams is right on target with its concern about notice and the order of payments to creditors. Often the order of distributions to creditors after confirmation of a Chapter 13 plan is hidden in the interaction of the plan and the programming of the trustee’s computer. In most districts, there is an order of distributions internal to the trustee’s office that experienced local practitioners know but others won’t. The order of payments can dramatically affect the rights of secured claim holders whose liens are retained by the confirmed plan but then impaired by an invisible pecking order for distributions. Relief from the confirmation order was granted in Abrams as a remedy for lack of notice of the order of payments.51
Debtors often provide preferred payments for alimony and support claims that are paid through the plan. There are good policy arguments for this payment preference. Also, feasibility of the plan may depend on a special payment priority for support—the debtor may be subject to contempt or criminal prosecution for nonpayment of court-ordered support. In cases filed before October 22, 1994, this payment preference for support was found in § 1322(b)(4) or in the general power to classify unsecured claims in § 1322(b)(1).52 In Chapter 13 cases filed after October 22, 1994, most claims for alimony, maintenance and support are priority claims under § 507(a)(7) entitled to full payment under § 1322(b)(2), and debtors have additional arguments for paying such claims in advance of other unsecured claims.53
A few courts have indicated that the nondischargeability of a claim may be a basis for payment in advance of other claims under § 1322(b)(4). In In re Foreman,54 the plan separately classified a nondischargeable student loan for payment in full concurrently with payment to secured claim holders. Other unsecured claim holders were scheduled to receive 100 percent after full payment of the student loan and of secured claims. The court approved this staggering of payments, citing in support that the student loan was nondischargeable and that § 1322(b)(4) permits payment of any unsecured claim concurrently with payment of any other secured or unsecured claim.55
The use of § 1322(b)(4) to prefer the payment of nondischargeable claims contains potential for mischief. Especially after the 1990 amendments, Chapter 13 debtors face a variety of common claims that are nondischargeable upon completion of payments under the plan.56 The separate classification of nondischargeable claims for more favorable treatment has generated much conflicting and difficult case law.57 Any proposal to pay a nondischargeable unsecured claim more quickly than other unsecured claims is a separate classification that must satisfy the unfair-discrimination standard in § 1322(b)(1).58 Few of the reported § 1322(b)(4) cases address the order of payments as a question of fair discrimination for purposes of § 1322(b)(1). That § 1322(b)(4) grants a Chapter 13 debtor some discretion to structure the order of payments to creditors does not answer the question whether every such proposal is fair discrimination for purposes of § 1322(b)(1). That most nondischargeable claims are not also priority claims59 is some evidence that nondischargeable character is not alone sufficient to justify a preference in the order of payments after confirmation.60
The payment of postpetition interest to an unsecured claim holder raises similar fairness considerations with respect to the order of payments to creditors. Discussed in detail elsewhere,61 there are many incentives for Chapter 13 debtors to pay postpetition interest to the holders of unsecured claims that are co-signed or that are nondischargeable. A plan that pays postpetition interest to some but not all unsecured claim holders raises difficult classification questions under § 1322(b)(1).62 That § 1322(b)(4) grants the debtor discretion to order the distribution of payments to creditors does not answer the question whether paying interest to some unsecured claim holders is fair discrimination. The Bankruptcy Court for the Southern District of Georgia reported a decision prohibiting Chapter 13 debtors from paying interest to selected unsecured claim holders until after the completion of distributions to other creditors—in effect, limiting the debtor’s discretion under § 1322(b)(4).63 In contrast, the bankruptcy court for the Northern District of Georgia permitted a Chapter 13 debtor to separately classify an undersecured, co-signed loan for payment in full with postpetition interest at the same time as payments to other secured creditors.64 Fractured authority is likely when principles in the Bankruptcy Code collide: the power to treat co-signed debts “differently” in § 1322(b)(1)65 is, perhaps, complemented by the discretion to order the distribution of payments under § 1322(b)(4), but these powers are tempered by the lien retention requirement in § 1325(a)(5)(B)(i).66
Debtor’s counsel must know the local practice relative to the order of payment of claims. In some jurisdictions, the standing Chapter 13 trustee routinely pays alimony and child support first, administrative expenses next, secured claims next and unsecured claims after all other claims (other than long-term debts) have been paid in full.67 To vary the trustee’s usual order of payments to creditors, the plan must specifically provide for a different treatment. Early consultation with the Chapter 13 trustee may avoid objection from the trustee. In some jurisdictions, long-term obligations like a home mortgage are paid in advance of other secured claim holders to avoid leaving the debtor with an accumulated arrearage during the life of the plan.68 Many courts have local rules or special practices with respect to the order and amount of payment of attorneys fees.69
Inconsistency between the order of payments required by a confirmed plan and the normal practice in a Chapter 13 trustee’s office was outcome determinative in United States v. Richman (In re Talbot).70 In Talbot, the confirmed plan trifurcated the IRS’s claims into a priority claim of $15,875, a secured claim of $18,674, and a general unsecured claim of $3,111. Twenty months after confirmation, the debtors sold their home, and the IRS demanded $38,646 to release its lien. By the time of sale, the trustee’s records showed that $11,702.83 in principal (plus interest) had been paid to the IRS through the confirmed plan. The trustee argued that the IRS’s recovery from the proceeds of sale was limited to the balance of its allowed secured claim, $6,971.25. The Tenth Circuit took a closer look and found that the plan and confirmation order “provide that allowed claims will be paid in the following order: administrative/attorney, priority, secured, unsecured.” Reallocating payments consistent with the confirmed plan, the Tenth Circuit concluded, “[I]t is clear . . . the entire secured claim of $18,674.08 plus interest remained to be paid.”71
In a few jurisdictions, courts require that unsecured claim holders receive some payments coincidental with commencement of payments to other claim holders. In such a jurisdiction, debtor’s counsel must very carefully calculate the payment into the plan to be sure that there will be funds left over after payment of secured and priority claims and administrative expenses to begin distributions to unsecured claim holders.
1 11 U.S.C. § 1322(b)(4).
2 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims for discussion of methods of paying unsecured claims.
3 Friendly Fin. Discount Corp. v. Bradley, 705 F.2d 1409 (5th Cir. 1983). Accord In re Baines, 263 B.R. 868, 873 (Bankr. S.D. Ill. 2001) (“According to Section 1322(b)(4), a debtor may choose, at his sole discretion, to pay his unsecured and secured creditors contemporaneously. It follows, then, that a debtor may opt to satisfy his secured creditors first.”).
4 11 U.S.C. § 1325(a)(5); 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 and 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2 Interest Rate Anarchy: Present Value before Till.
5 See In re Baines, 263 B.R. 868, 873–74 (Bankr. S.D. Ill. 2001) (“[A] debtor may opt to satisfy his secured creditors first. More often than not, a debtor chooses this latter approach; that way, if the case is dismissed or fails, the debtor may be in a better position to keep certain property, e.g., his home or car. . . . [T]his is entirely acceptable under the Code.”). See also §§ 319.1 [ In Cases Filed before October 22, 1994 ] § 145.1 In Cases Filed before October 22, 1994 and 320.1 [ In Cases Filed after October 22, 1994 ] § 145.2 In Cases Filed after October 22, 1994.
6 263 B.R. 868 (Bankr. S.D. Ill. 2001).
7 263 B.R. at 873–74.
8 See discussion of preconfirmation modification beginning at § 114.1 Timing, Procedure and Form.
9 See discussion of modification after confirmation beginning at § 126.1 Standing, Timing and Procedure.
10 See §§ 145.1 [ Accelerating Payment of a Home Mortgage ] § 85.4 Accelerating Payment of a Home Mortgage, 164.1 [ Projected (Disposable) Income ] § 91.2 Projected (Disposable) Income, 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3 Reasonably Necessary for Maintenance or Support and 188.1 [ Greed, Not Need ] § 107.1 Greed, Not Need.
11 In re Schnabel, 153 B.R. 809, 821 (Bankr. N.D. Ill. 1993) (Court overrules creditor’s objection to proposed payment of priority tax debt before payments to unsecured creditors. “Under § 1322(a)(2), the plan must provide for payment in full of all unsecured priority claims. . . . While under § 1322(b)(4) a plan may provide for payment of priority claims concurrently with general unsecured claims, there is no requirement for concurrent payment.”); In re Johnson, 63 B.R. 550 (Bankr. D. Colo. 1986); In re Tenney, 63 B.R. 110 (Bankr. W.D. Okla. 1986) (Citing § 1326(b), debtor is permitted to pay administrative expenses in full, including attorneys’ fees, in advance of any payments to other claim holders.).
12 11 U.S.C. § 1322(a)(2). See §§ 98.1 [ Plan Must Provide Full Payment ] § 73.1 Plan Must Provide Full Payment, 100.1 [ Deferred Payments Are Permitted ] § 73.4 Deferred Payments Are Permitted and 291.1 [ Treatment of Priority Claims ] § 136.1 Treatment of Priority Claims.
13 The order of distribution of property in 11 U.S.C. § 726(a) does not apply in a Chapter 13 case. See 11 U.S.C. § 103(b). In a Chapter 13 case, all of the claims entitled to priority under § 507 have the same priority of distribution—all are entitled to payment in full, but in no particular order. See, e.g., In re Hages, 252 B.R. 789, 798 (Bankr. N.D. Cal. 2000) (After conversion from Chapter 7 to Chapter 13, the Chapter 7 trustee’s fees are payable “pro rata and simultaneously” with allowed expenses of administration in the Chapter 13 case: “This is the natural result of sections 507(a)(1), 1322(a)(2) and 1326(b)(1).”).
14 See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2 What Claims Are Priority Claims?, 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8 Special Provisions for Attorneys’ Fees and 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6 Debtors’ Attorneys’ Fees before BAPCPA.
15 11 U.S.C. § 1326(b)(1) (emphasis added).
16 See In re Meadows, 297 B.R. 671, 674 (Bankr. E.D. Mich. 2003) (“[S]ection 1326(b) permits the payment of attorney fees either before or simultaneously with payments to creditors. . . . [P]ayment of attorney fees prior to distribution to other creditors is not improper, it is expressly permitted under the Code.”); In re Moses, 293 B.R. 711, 718 (Bankr. E.D. Mich. 2003) (“By providing for payment of the Debtor’s attorney’s fees before any distribution is made to DaimlerChrylser under the plan, the Debtor’s plan conforms to § 1326(b)(1). . . . [I]t mandates that administrative expenses be paid before or at the time of any payments to creditors under the plan.”); In re Hallmark, 225 B.R. 192 (Bankr. C.D. Cal. 1998) (Section 1326(b) ordinarily would require payment of administrative claim for attorney fees before or at the same time as payments to other creditors; but because confirmed plan provided zero payment to debtor’s counsel, trustee had no authority to pay counsel’s administrative claim, and trustee could not recover from other creditors any portion of distributions under confirmed plan.).
17 In re Shorb, 101 B.R. 185 (B.A.P. 9th Cir. 1989). See also In re Pedersen, 229 B.R. 445 (Bankr. E.D. Cal. 1999) (Pursuant to guidelines for attorneys’ fees in Chapter 13 cases, debtor’s attorney can voluntarily accept fees through the plan at the lesser of $200 per month or 50% of receipts concurrently with payments to other creditors.); In re Townsend, 186 B.R. 248, 249 (Bankr. E.D. Mo. 1994) (Plan cannot pay debtors’ attorneys’ fees ahead of and “to exclusion of” mortgage arrearage. “The opportunity to cure a default is a shield by which a debtor can heal a delinquent debt. It is not a sword which the debtor can use to further delay payment while the attorney collects a fee. . . . Payment of attorney fees cannot usurp the obligation to provide equal monthly payments beginning with the first disbursement under the plan.”).
18 In re Lanigan, 101 B.R. 530 (Bankr. N.D. Ill. 1989).
19 In re Lanigan, 101 B.R. 530 (Bankr. N.D. Ill. 1989). Accord In re Cook, 205 B.R. 437, 442–43 (Bankr. N.D. Fla. 1997) (Section 1326(b) “does not require attorney’s fees to be paid in full prior to payments to creditors, it simply requires that they be paid before or contemporaneously with payments to creditors.” Payments to secured creditors through the plan must at least equal depreciation. If the plan cannot pay secured claim holders and attorney’s fees at the same time, “the debtor will be faced with a choice between paying attorney’s fees over a longer period of time under the plan on the one hand, and dismissal or conversion on the other.”).
20 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
21 In re Cason, 190 B.R. 917, 933–34 (Bankr. N.D. Ala. 1995) (Applying § 1326(b), adequate protection paid to the Chapter 13 trustee before confirmation must be held by the trustee until confirmation and distributed contemporaneously with payments of administrative expenses. “Section 1326(b) . . . clearly requires the payment of administrative expenses to be made before or contemporaneously with the payments to other claimholders under the plan. . . . As the Code gives the choice between paying administrative expenses before or concurrently with claimholder’s claims (so long as the payment of administrative expenses begins no later than the first payment to claimholders) and the plan is silent to this point, the Court elects for administrative expenses and adequate protection to be paid at the same time. In the event the trustee does not have enough funds to handle these payments then they should be paid pro rata. There is no provision of § 507(a)(1) which requires full payment of priority claims before payments can begin to other claimholders. . . . The only restriction in requiring deferred payments is that the trustee cannot make any payment on the claims of creditors unless at the same time she makes an administrative expense payment. . . . [A]dequate protection payments would be paid as payments under the plan pursuant to § 1326. These payments would start to accrue upon motion and be paid post confirmation at the same time as the payment of administrative expenses and trustee fees as provided in § 1326. Insufficiency of funds would require the standing trustee to make a pro rata distribution. In the event confirmation is denied, claimholders whose adequate protection failed would be entitled to superpriority pursuant to § 507(b) (which would allow payment of accrued adequate protection ahead of other administrative expenses).”).
22 See § 292.1 [ Taxes ] § 136.2 Taxes before BAPCPA.
23 495 U.S. 545, 110 S. Ct. 2139, 109 L. Ed. 2d 580 (1990).
24 See § 292.1 [ Taxes ] § 136.2 Taxes before BAPCPA.
25 189 B.R. 732 (Bankr. W.D. Wis. 1995).
26 189 B.R. at 743.
27 See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination.
28 See § 63.1 [ Standard Percentage Fee and Expenses ] § 54.1 Standard Percentage Fee and Expenses.
29 See § 293.1 [ Trustee’s Fees and Expenses ] § 136.4 Trustee’s Fees and Expenses before BAPCPA.
30 See §§ 56.1 [ Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts ] § 51.3 Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts and 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1 Debtor Can Assume, Assign or Reject Executory Contracts.
31 See § 173.1 [ Debtor Must Cure Defaults and Assure Future Performance ] § 102.2 Debtor Must Cure Defaults and Assure Future Performance.
32 See §§ 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination and 158.2 [ Landlords and Lessors ] § 89.3 Landlords and Lessors.
33 See § 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA. See, e.g., In re McNichols, 249 B.R. 160, 180 (Bankr. N.D. Ill. 2000) (Proposal to pay junior mortgage in full during three-year plan and to pay senior judgment lien in the 36th month “is in contravention of § 1322(b)(4).”).
34 In re Johnson, 63 B.R. 550 (Bankr. D. Colo. 1986). Accord In re Allen, 240 B.R. 231, 242 (Bankr. W.D. Va. 1999) (Court disapproves paying administrative expenses in advance of secured creditors after confirmation. “The court agrees with KEMBA that the procedure for paying administrative expenses of the case from the estate to the extent of available funds prior to payment of amounts due secured creditors is not in compliance with the requirements of section 1325(a)(5)(B)(ii) of the Code. . . . [I]t is inconsistent with the priorities of payment established in section 507 of the Code. . . . Subsection (b) of that section expressly provides that a secured creditor which has a claim against the estate for adequate protection payments allowed to it has priority for such payments over all other administrative expenses in the case. Therefore, payments due under the confirmed plan with respect to ‘allowed secured claims’ have priority over the administrative expenses, not vice-versa.”); In re Townsend, 186 B.R. 248, 249 (Bankr. E.D. Mo. 1994) (Plan cannot pay debtors’ attorneys’ fees ahead of and “to exclusion of” mortgage arrearage. “The opportunity to cure a default is a shield by which a debtor can heal a delinquent debt. It is not a sword which the debtor can use to further delay payment while the attorney collects a fee. . . . Payment of attorney fees cannot usurp the obligation to provide equal monthly payments beginning with the first disbursement under the plan.”). But see In re Dews, 191 B.R. 86, 92 (Bankr. E.D. Va. 1995) (Debtor not required to make periodic adequate protection payments to car lender notwithstanding that lender will wait eight months after confirmation before it receives distributions because plan pays mortgage arrearages and priority attorney fees before car lender and notwithstanding evidence that the car will depreciate in excess of $200 per month. “Unlike [In re Johnson, 63 B.R. 550 (Bankr. D. Colo. 1986)] the eight months of depreciation in this case will not leave Chrysler with collateral that has little or no value. If that were the case, then a different result might follow. . . . [T]he payments for depreciation that Chrysler seeks would give it more than the value of its collateral. Furthermore, it should be pointed out that Chrysler is adequately protected under the terms of the proposed plan, because its allowed secured claim will be paid in full, with interest. The timing of the valuation also serves to protect Chrysler as it will get an amount equal to the value set as of the date of the filing of the Chapter 13 plan. . . . If the debtors in this case are forced to pay over $200.00 per month to Chrysler to compensate it for depreciation of the vehicle, then it is entirely likely that a Chapter 13 will not be possible. . . . As both parties have pointed out, it is always possible in a case such as this that the debtor will pay off the mortgage arrears and then file Chapter 7, leaving the creditor with significantly depreciated collateral. However, as in life, all risks can not be eliminated under the Bankruptcy Code.”).
35 205 B.R. 437 (Bankr. N.D. Fla. 1997).
36 205 B.R. at 442–43. Accord In re Rogers, 239 B.R. 883, 886–89 (Bankr. E.D. Tex. 1999) (On car lender’s motion for relief from the stay and adequate protection in a district that delays confirmation, court conditions continuation of stay that at confirmation one-half of accumulated payments held by the Chapter 13 trustee will be paid to secured claim holders in advance of administrative expenses and in the event of conversion or dismissal, lienholders will share equally with administrative claimants in funds held by trustee. Court describes the “almost universal” practice in the district that “first available funds distributed by the Chapter 13 Trustee will go to the payment of the fees for the debtor’s attorney.” There is “nothing impermissible about this provision and, in fact, it is expressly authorized, though not mandated, by § 1326(b)(1) of the Bankruptcy Code.” But the effect is to put the risk of failure of a Chapter 13 case “entirely . . . upon the shoulders of secured creditors.” “While prompt compensation of professionals is certainly one objective of the Bankruptcy Code, the protection of creditor interests is given an equivalent degree of prominence . . . . § 1326(b) specifically authorizes the payment of administrative claims either ‘before or at the time of each payment to creditors under the plan.’ It is undoubtedly true that a delay in the receipt of plan payments is a necessary consequence in a ‘late confirmation’ district. However, under circumstances in which a creditor’s interest is deserving of additional protection, as in this case, to add to that delay by preventing the receipt of any payment by a secured creditor in deference to the full and complete payment of professional fees is inconsistent with provisions of the Bankruptcy Code and can no longer be endorsed by this Court.”).
37 293 B.R. 711 (Bankr. E.D. Mich. 2003).
38 293 B.R. at 714–18.
39 297 B.R. 671 (Bankr. E.D. Mich. 2003).
40 297 B.R. at 672.
41 297 B.R. at 673–75.
42 Nos. 00-57539, 01-CV-74375-DT, 2002 WL 551036 (E.D. Mich. Apr. 8, 2002) (unpublished).
43 290 B.R. 302 (Bankr. E.D. Mich. 2003).
44 290 B.R. at 304.
45 See § 103.1 [ Classification of Secured Claims ] § 74.7 Classification of Secured Claims for discussion of classification of secured claims. See also § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination for discussion of the “same treatment” requirement in § 1322(a)(3).
46 See § 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA for discussion of the lien retention requirement in § 1325(a)(5)(B)(i).
47 No. 01-11493-MAM-13, 2002 WL 1404761 (Bankr. S.D. Ala. Mar. 8, 2002) (unpublished).
48 These were significant omissions from the plan with respect to a lienholder. See §§ 113.1 [ Full Payment of Allowed Secured Claim ] § 78.1 Full Payment of Allowed Secured Claim and 114.1 [ Calculating Payments to Secured Claim Holders ] § 78.2 Calculating Payments to Secured Claim Holders.
49 2002 WL 1404761, at *1 n.1.
50 2002 WL 1404761, at *3–*4.
51 See § 223.1 [ Relief from Confirmation Order: Bankruptcy Rules 9023 and 9024 ] § 117.2 Relief from Confirmation Order: Bankruptcy Rules 9023 and 9024 for discussion of relief from confirmation orders under Bankruptcy Rules 9023 and 9024.
52 See §§ 152.2 [ Alimony, Maintenance and Support ] § 88.4 Alimony, Maintenance and Support and 303.1 [ Alimony, Maintenance and Support in Cases Filed before October 22, 1994 ] § 138.1 Alimony, Maintenance and Support in Cases Filed before October 22, 1994.
54 136 B.R. 532 (Bankr. S.D. Iowa 1992).
55 In re Foreman, 136 B.R. 532 (Bankr. S.D. Iowa 1992), may be inconsistent with the later decision by the Eighth Circuit in Groves v. LaBarge (In re Groves), 39 F.3d 212 (8th Cir. 1994). Groves held that it was unfair discrimination for a Chapter 13 plan to separately classify nondischargeable student loans for 100% payment while paying less than 40% of other unsecured claims. In Foreman, the plan proposed 100% to all unsecured claim holders but separately classified the nondischargeable student loan for payment before other unsecured claims. Although the classifications were quite different, Groves suggests that the Eighth Circuit might not tolerate the more favorable treatment of the student loans in Foreman. Classification issues with respect to student loans are discussed in § 153.1 [ Student Loans ] § 88.6 Student Loans.
56 See discussion of exceptions to discharge beginning at § 158.1 Alimony, Maintenance or Support.
57 See discussion beginning at § 88.1 In General.
58 See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination.
59 The notable exception is debts for alimony, maintenance, or support described in § 507(a)(7), as amended by the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 304, 108 Stat. 4106 (1994). See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2 What Claims Are Priority Claims?, 151.1 [ Priority Claims ] § 87.4 Priority Claims and 152.2 [ Alimony, Maintenance and Support ] § 88.4 Alimony, Maintenance and Support.
60 See In re Eiland, 170 B.R. 370 (Bankr. N.D. Ill. 1994) (Nondischargeable student loans cannot be paid in full as “priority” claims in advance of other unsecured claim holders because student loans are not priority claims under § 507.).
62 See §§ 150.1 [ Co-signed Debts ] § 87.3 Co-signed Debts, 153.1 [ Student Loans ] § 88.6 Student Loans and 156.1 [ Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case ] § 88.10 Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case.
63 See In re Butler, 242 B.R. 553, 558–59 (Bankr. S.D. Ga. 1999) (To avoid relief from the codebtor stay under § 1301(c)(1), Chapter 13 debtor must pay postpetition interest to the holder of an unsecured, co-signed claim; however, plan cannot pay postpetition interest to the co-signed claim holder until after secured, priority and general unsecured claims have been paid through the plan. “While the text and legislative history of Section 1301 contemplate the payment of post-petition interest, they do not directly address the timing of such payment . . . . Section 1326 governing plan payments provides no direct guidance . . . . Outside of Chapter 13, the only provision of the Bankruptcy Code that specifically addresses the order for payment of claims is Section 726 . . . . [T]hat section is useful by analogy because to be confirmed a Chapter 13 plan must meet the hypothetical liquidation test found in Section 1325(a)(4). . . . Section 726(a)(5) provides that payment of post-petition interest should be made after payment of all other claims, including unsecured claims both timely and tardily filed in a Chapter 7 case. I hold that the Chapter 13 Trustee may pay claims for post-petition interest only after secured claims, priority claims, and the principal amount of distributions on allowed unsecured claims.”).
64 See In re Monroe, 281 B.R. 398, 402–03 (Bankr. N.D. Ga. 2002) (“Section 1322(b)(4) allows a debtor’s Chapter 13 plan to pay an unsecured claim at the same time as secured claims. . . . The plain language of the statute does not place any restrictions nor conditions on the debtor’s freedom to avail himself or herself of § 1322(b)(4) . . . . Chapter 13 gives the debtor the flexibility to choose which debts to pay first. Normally, debtors will choose to pay those debts that would otherwise survive bankruptcy. However, there is no mandate, as evidenced by the language of § 1322(b)(4) that requires the debtor to pay secured debts first. The debtor should have the right to pay an unsecured claim, including the interest allowed in the case of a co-signed debt, if the debtor determines that it is in his or her best interest to do so and the plan continues to comply with the other requirements of Chapter 13.”).
65 See § 150.1 [ Co-signed Debts ] § 87.3 Co-signed Debts.
66 Lien retention and accounting for postpetition depreciation are discussed in § 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA.
67 See, e.g., In re Abrams, No. 01-11493-MAM-13, 2002 WL 1404761, at *3 (Bankr. S.D. Ala. Mar. 8, 2002) (unpublished) (“The chapter 13 trustee’s practice is to pay priority claims first, then preference claims, then after preference claims are paid, other secured claims being paid pro rata without a preference, and then unsecured claims.”).
68 See, e.g., In re Stewart, 290 B.R. 302 (Bankr. E.D. Mich. 2003) (Model Chapter 13 plan in the district provided that home mortgage claims could be separately classified and paid in advance of other secured debt.).
70 124 F.3d 1201 (10th Cir. 1997).
71 124 F.3d at 1210.