§ 136.1 — Treatment of Priority Claims

Revised: March 16, 2010

[1]

With one statutory exception,1 claims that are entitled to priority under § 507 must be paid in full to accomplish confirmation of a Chapter 13 plan, unless the holder agrees to different treatment; but, with respect to many priority claims, full payment can be accomplished in deferred payments through the plan without postpetition interest.2 Many Chapter 13 cases are composition plans that pay less than 100 percent of unsecured claims. Identifying priority claims is quite important—priority claims are entitled to 100 percent payment even when other unsecured claim holders can be paid less. But priority claims often are paid in full without postpetition interest even when a different characterization would merit an entitlement to interest.3

[2]

The list of claims and expenses entitled to priority under § 507 was amended by the Bankruptcy Reform Act of 19944 and again by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).5 In Chapter 13 cases filed before October 22, 1994, (former) § 507(a) listed eight levels of priority.6 After the 1994 Act, there were nine,7 and BAPCPA added a tenth.8

[3]

In Chapter 13 cases filed before October 17, 2005, § 1322(a)(2) treats all priority claims listed in § 507(a) as equal for purposes of the full-payment requirement. Detailed elsewhere,9 BAPCPA amended § 1322(a)(4) to permit a plan to pay less than 100 percent of a domestic support obligation assigned to a governmental entity, for purposes other than collection, but only if the debtor commits to the plan “all of the debtor’s projected disposable income for a 5-year period.”10

[4]

Section 1322(a)(2) mandates full payment of all “claims entitled to priority under section 507.”11 Section 507 lists “expenses and claims” that have priority.12 “Administrative expenses allowed under § 503(b)” are now the second priority in § 507(a)(2).13 Technically, administrative expenses are not priority claims for purposes of the full-payment requirement in § 1322(a)(2).14 Perhaps because administrative expenses were listed first in § 507 (until BAPCPA moved them to second place) along with all the other priority claims, practitioners and courts often treat administrative expenses as a class of priority claims in Chapter 13 cases. This confusion has significance for the payment of postpetition interest, for the filing of proofs of claim and for the discharge of postpetition debts.15

[5]

The Bankruptcy Reform Act of 1994 added one priority to the list in § 507(a) and amended several others. Of most importance to Chapter 13 practitioners was the insertion of a new seventh priority for debts to a spouse, former spouse or child “for alimony to, maintenance for or support of such spouse or child.”16 The elevation of alimony, maintenance or support to priority status in Chapter 13 cases filed after October 22, 1994, has many effects on Chapter 13 practice.17 BAPCPA broadened, redefined and repositioned the seventh priority.18 “Domestic support obligations”19 now have first priority,20 and a priority claim for a domestic support obligation includes postpetition interest.21

[6]

Throughout § 507(a), the 1994 and 2005 amendments increased the specific dollar amounts that are entitled to priority. For example, priority claims for wages, salaries or commissions in bankruptcy cases filed after October 22, 1994, were doubled from $2,000 to $4,000 for each claimant.22 These dollar amounts increased again on April 1, 1998, to $4,300, again on April 1, 2001, to $4,650, and again on April 1, 2004, to $4,925. BAPCPA jumped the wage priority to $10,000,23 and that amount automatically adjusted on April 1, 2007, to $10,950. Another automatic adjustment on April 1, 2010, increased the amount to $11,725. All the amounts entitled to priority in § 507(a) will automatically adjust on April Fool’s Day every three years.24 Other new priorities added to § 507 in 1994 are of less importance in Chapter 13 cases.25 BAPCPA added a tenth priority, which would be entitled to full payment in Chapter 13 cases, for death or personal injury “resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated.”26

[7]

Because of the full-payment requirement in § 1322(a)(2), Chapter 13 plans often separately classify claims that are entitled to priority.27 The full-payment requirement does not mean that priority claims must be paid in the order of priority listed in § 507 or that priority claims are fully paid before other claims receive any plan distribution.28

[8]

The general rule of payment in full of priority claims without postpetition interest has important exceptions. The largest exception is probably domestic support obligations in Chapter 13 cases filed on or after October 17, 2005. Detailed elsewhere,29 a 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.”30 After BAPCPA, domestic support obligations are a special class of claim that includes accruing postpetition interest. The full-payment mandate in § 1322(a)(2) would seem to include any postpetition interest that accrues as part of a domestic support obligation claim.31

[9]

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.”32 Unsecured claims that are nondischargeable and also entitled to priority would include domestic support obligations33 and some drunk driving claims.34 There are also some tax debts that would be both priority and nondischargeable—for example, withholding taxes entitled to priority under § 507(a)(8)(C) and unfiled, fraudulently filed or willfully evaded taxes that are described in § 523(a)(1)(B) and (C).35 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 payment of priority claims in full under § 1322(a)(2); but because these debts are nondischargeable, paying postpetition interest will be in the debtor’s best interest whenever there is sufficient income to do so.

[10]

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.36


 

1  In Chapter 13 cases filed on or after October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), amended 11 U.S.C. § 1322(a)(4) to except from the full-payment requirement in § 1322(a)(2) claims entitled to priority under § 507(a)(1)(B)—domestic support obligations that have been assigned to a governmental entity for purposes other than collection. 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 and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

2  11 U.S.C. § 1322(a)(2). See below in this section, and see § 73.1  Plan Must Provide Full Payment, § 73.3  Priority Claims Added or Changed by BAPCPA, § 73.10  Filing Fees, § 73.11  Filing Fees after BAPCPA, § 136.16  Postpetition Interest on Priority Claims before BAPCPA and § 136.17  Postpetition Interest on Priority Claims after BAPCPA.

 

3  See § 73.5  Interest Not Required, with Exceptions, § 73.6  Treatment of Priority Claims Changed by BAPCPA§ 136.16  Postpetition Interest on Priority Claims before BAPCPA and § 136.17  Postpetition Interest on Priority Claims after BAPCPA.

 

4  Pub. L. No. 103-394, 108 Stat. 4106 (1994).

 

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

 

6  The eighth priority before the 1994 amendment (ninth priority in cases filed after October 22, 1994)—11 U.S.C. § 507(a)(8), redesignated as 11 U.S.C. § 507(a)(9) and amended by the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 501(D)(11)(A), 108 Stat. 4106 (1994)—was added to the Code by the Crime Control Act of 1990, Pub. L. No. 101-647, § 2522(d), 104 Stat. 4789 (1990), and is effective in Chapter 13 cases filed after October 29, 1990. This priority deals with obligations arising from a debtor’s failure to maintain the capital of an Insured Depository Institution. Claims under this priority are generally held by the Resolution Trust Corporation (RTC) or Federal Deposit Insurance Corporation (FDIC) and typically are large enough that the debtor is not eligible for Chapter 13. The increase in the debt limitations for Chapter 13 since the 1994 Act, see § 11.1 [ Dollar Amounts ] § 14.1  Dollar Amounts, may give this priority new relevance in Chapter 13 cases.

 

7  The Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 (Oct. 22, 1994), added a new priority—then designated as 11 U.S.C. § 507(a)(7)—for debts for alimony, maintenance or support. See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims? and 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994. The seventh priority for alimony, maintenance and support was redefined and redesignated as 11 U.S.C. § 507(a)(1) by BAPCPA in 2005.

 

8  In Chapter 13 cases filed on or after October 17, 2005, BAPCPA created a tenth priority in 11 U.S.C. § 507(a)(10) for claims for death or personal injury resulting from the operation of a motor vehicle or vessel while intoxicated. See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 522.1 [ The New DWI Priority ] § 136.22  The Driving or Boating while Intoxicated Priority after BAPCPA.

 

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

 

10  11 U.S.C. § 1322(a)(4), discussed in §§ 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims 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.

 

11  11 U.S.C. § 1322(a)(2) (emphasis added). 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.

 

12  11 U.S.C. § 507(a) (emphasis added).

 

13  11 U.S.C. § 507(a)(2) (emphasis added), as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005). See § 279.1 [ Priority Claims, Including Requests for Payment of Administrative Expenses ] § 132.6  Priority Claims, Including Requests for Payment of Administrative Expenses.

 

14  See § 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims?. See also Sidney P. Levinson, Does an Administrative Expense Constitute a “Claim” under the Bankruptcy Code?, 25 Cal. Bankr. J. 389 (2000).

 

15  See discussion beginning at § 73.1  Plan Must Provide Full Payment and § 136.2  Taxes before BAPCPA, and § 137.1  Postpetition Claims before BAPCPA§ 137.2  Postpetition Claims after BAPCPA and § 158.6  Postpetition Claims.

 

16  11 U.S.C. § 507(a)(7), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 304, 108 Stat. 4106 (1994). See § 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994.

 

17  See §§ 151.1 [ Priority Claims ] § 87.4  Priority Claims, 152.2 [ Alimony, Maintenance and Support ] § 88.4  Alimony, Maintenance and Support, 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994 and 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support. See, e.g., In re Messinger, 241 B.R. 697 (Bankr. D. Idaho 1999) (Child support debt is a priority claim under § 507(a)(7) that must be paid in full under § 1322(a)(2); full payment does not include postpetition interest, but accruing postpetition interest on nondischargeable child support judgment is nondischargeable at the completion of payments under the plan.); In re Pitt, 240 B.R. 908 (Bankr. N.D. Cal. 1999) (Priority support claims are nondischargeable and entitled to full payment without interest under § 1322(a)(2); court denies confirmation of plans that purport to discharge the accruing postpetition interest. Support debts are both priority and nondischargeable, thus postpetition interest on a support debt is not discharged in the same manner as interest on a priority, dischargeable tax claim.).

 

18  11 U.S.C. § 507(a)(1), as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005). See discussion beginning at § 73.3  Priority Claims Added or Changed by BAPCPA and § 136.21  Domestic Support Obligations after BAPCPA.

 

19  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.

 

20  11 U.S.C. § 507(a)(1), 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.

 

21  See below in this section, and see § 73.6  Treatment of Priority Claims Changed by BAPCPA, § 136.16  Postpetition Interest on Priority Claims before BAPCPA and § 136.21  Domestic Support Obligations after BAPCPA.

 

22  11 U.S.C. § 507(a)(3), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 207, 108 Stat. 4106 (1994).

 

23  11 U.S.C. § 507(a)(4), as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

24  See 11 U.S.C. § 104(b).

 

25  See, e.g., the new priority for independent sales representatives in 11 U.S.C. § 507(a)(3), as amended by the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 207, 108 Stat. 4106 (1994).

 

26  11 U.S.C. § 507(a)(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 §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 522.1 [ The New DWI Priority ] § 136.22  The Driving or Boating while Intoxicated Priority after BAPCPA.

 

27  See § 87.4  Priority Claims, § 87.5  Priority Claims after BAPCPA, § 88.4  Alimony, Maintenance and Support and § 88.5  Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA.

 

28  See §§ 204.2 [ Order of Payments to Creditors ] § 113.7  Order of Payments to Creditors before BAPCPA and 501.1 [ Order of Payments to Creditors ] § 113.8  Order of Payments to Creditors after BAPCPA for discussion of the order of payments. See, e.g., In re Aldridge, 335 B.R. 889, 893 (Bankr. S.D. Ala. 2005) (Mahoney) (Section 1322(a)(2) requires full payment of claims entitled to priority under § 507 but does not require payments in order of priority found in § 507. “The Code does not require the payment of § 507(a)(7) claims in full before any payments are disbursed on § 507(a)(8) claims. Conversely, the Code does not require concurrent payment of priority claims. Thus, a debtor could provide a plan that mandated the specific order in which claims were to be paid, and if such plan was confirmed, the trustee would have a duty to disburse the plan payments to the creditors as provided for in the confirmed plan.” Because confirmed plan provided payment of priority claims in order set forth in § 507, child support under § 507(a)(7) must be paid ahead of IRS under § 507(a)(8).).

 

29  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.

 

30  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).

 

31  See § 73.6  Treatment of Priority Claims Changed by BAPCPA§ 136.16  Postpetition Interest on Priority Claims before BAPCPA and § 136.21  Domestic Support Obligations after BAPCPA.

 

32  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.

 

33  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).

 

34  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).

 

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

 

36  See § 73.5  Interest Not Required, with Exceptions, § 136.3  Taxes after BAPCPA§ 136.15  Miscellaneous Administrative Expenses and Priority Claims after BAPCPA§ 136.16  Postpetition Interest on Priority Claims before BAPCPA and § 136.17  Postpetition Interest on Priority Claims after BAPCPA. See, e.g., United States v. Fowler (In re Fowler), 394 F.3d 1208, 1212 (9th Cir. 2005) (Tax debt incurred during a Chapter 11 case before conversion to Chapter 13 can be an administrative expense which must be paid in full with interest as a priority claim; if the tax debt is treated as a prepetition unsecured claim, it has eighth priority and is also entitled to payment in full under § 1322(a)(2) but without interest. “[T]he most important distinction between administrative expense tax claims and unsecured priority tax claims in Chapter 13 is that the IRS cannot recover interest on prepetition unsecured priority tax claims.” The court does not explain the statutory source for the right to interest on administrative expenses other than to note that administrative expenses entitled to priority include the penalties and interest that accrued during the Chapter 11 case prior to conversion.).