§ 136.17 — Postpetition Interest on Priority Claims after BAPCPA

Revised: March 29, 2006

[1]

BAPCPA did not change the general rule that in a Chapter 13 case a debtor can pay priority claims in full through the plan without postpetition interest under § 1322(a)(2).1 Sometimes this is good news for Chapter 13 debtors. For example, taxes entitled to priority under § 507 that are not also nondischargeable at the completion of payment under § 1328(a) can be paid in a Chapter 13 case in full without postpetition interest, and the debtor discharges the debt entirely.

[2]

When an unsecured debt is nondischargeable in a Chapter 13 case and accrues postpetition interest, the debtor has a problem because postpetition interest is generally not allowable and can’t be paid through the plan.2 The accruing postpetition interest on a nondischargeable claim is a nondischargeable debt that will follow the debtor after the completion of payments under the plan. There is no reliable way for a Chapter 13 debtor to pay postpetition interest on account of an unsecured debt that is also nondischargeable when other unsecured creditors are not being paid in full with interest through the plan.

[3]

When the nondischargeable debt is also a priority debt, the debtor is obligated to pay the claim in full, but prior to BAPCPA, priority status did not give Chapter 13 debtors license to pay postpetition interest to an unsecured claim holder.

[4]

There is a new possibility in Chapter 13 cases: a claim that is nondischargeable, that is entitled to priority under § 507 and that includes postpetition interest. A domestic support obligation (DSO), as defined by BAPCPA in new § 101(14A), includes postpetition interest, is granted first priority by § 507(a)(1)3 and is nondischargeable under § 1328.4

[5]

“Notwithstanding any other provision of” title 11, a DSO is defined by § 101(14A) to include “interest that accrues on that debt as provided under applicable nonbankruptcy law.”5 Unlike any other unsecured debt in a Chapter 13 case, DSOs after BAPCPA include interest accruing before and after the petition. Presumably, the “notwithstanding” phrase would prevent disallowance of postpetition interest as part of a DSO if an objection were raised under § 502(b)(2). Would the “notwithstanding” also overcome objection to confirmation of a plan that proposed to pay the DSO in full with postpetition interest notwithstanding that other unsecured claim holders—including other priority claim holders—would not receive postpetition interest under the plan? Is the unfair discrimination barrier to classification of claims in § 1322(b)(1) trumped by the “notwithstanding” in § 101(14A)? The answer is probably yes: the “subject to” § 1322(a) in § 1322(b) allows the favorable classification, and the “notwithstanding” adds postpetition interest to the DSO claim.6

[6]

Chapter 13 debtors will want to separately classify DSOs for full payment with postpetition interest to maximize the use of disposable income to pay a debt that will otherwise accrue interest and be nondischargeable after the completion of payments under the plan. In the pre-BAPCPA world, efforts by Chapter 13 debtors to pay nondischargeable student loans in full with or without postpetition interest when other unsecured claim holders were not being paid in full were generally rejected by the courts.7 Debtors were allowed to pay priority claims for alimony, maintenance or support in full because those debts were priority claims under § 507, not because they were nondischargeable.8

[7]

The added wrinkle after BAPCPA is the definition in § 101(14A) that includes postpetition interest in the DSO debt itself. Arguably, paying a priority DSO in full as required by § 1322(a)(2) includes paying the accruing postpetition interest component of the debt. This interpretation of § 101(14A) and § 1322(a)(2) should overcome the reluctance of the courts pre-BAPCPA to allow the payment of postpetition interest on priority claims through a Chapter 13 plan.

[8]

There is one other new priority debt that may be entitled to postpetition interest. BAPCPA added a new tenth priority to § 507(a) for “allowed claims 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 from using alcohol, a drug, or another substance.”9 Unlike the other debts entitled to priority under § 507(a), this tenth priority is not limited to “unsecured” claims. A DWI debt that fits the new tenth priority could also be secured by a lien. This is not a far-fetched possibility. Under nonbankruptcy law, the recording of a DWI judgment is likely to constitute a lien on the debtor’s property.

[9]

In a Chapter 13 case, a DWI debt secured by a lien and entitled to tenth priority under new § 507(a)(10) might be entitled to both payment in full under § 1322(a)(2) and treatment as a secured debt under § 1325(a)(5). The typical treatment of a secured debt under § 1325(a)(5) includes present value interest.10 A similar possibility existed under pre-BAPCPA law for alimony, maintenance or support secured by a lien on estate property.11


 

1  11 U.S.C. § 1322(a)(2), discussed in §§ 100.2 [ Interest Not Required, with Exceptions ] § 73.5  Interest Not Required, with Exceptions, 299.1 [ Postpetition Interest on Priority Claims ] § 136.16  Postpetition Interest on Priority Claims before BAPCPA and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

2  See 11 U.S.C. § 502(b)(2).

 

3  See 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.

 

4  See 11 U.S.C. § 1328(a) and (b), discussed in §§ 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5) and 558.1 [ New and Changed Exceptions to Hardship Discharge ] § 160.7  Exceptions to Hardship Discharge Added or Changed by BAPCPA.

 

5  11 U.S.C. § 101(14A).

 

6  See 11 U.S.C. § 1322(a)(2), discussed in § 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

7  See §§ 153.1 [ Student Loans ] § 88.6  Student Loans and 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts.

 

8  See §§ 151.1 [ Priority Claims ] § 87.4  Priority Claims and 152.2 [ Alimony, Maintenance and Support ] § 88.4  Alimony, Maintenance and Support.

 

9  11 U.S.C. § 507(a)(10), discussed in § 522.1 [ The New DWI Priority ] § 136.22  The Driving or Boating while Intoxicated Priority after BAPCPA.

 

10  See § 11.1 [ Dollar Amounts ] § 14.1  Dollar Amounts.

 

11  See §§ 300.1 [ Secured Priority Claims? ] § 136.18  Secured Priority Claims before BAPCPA and 321.1 [ Standing, Procedure and Grounds for Conversion to Chapter 11 ] § 146.1  Standing, Procedure and Grounds for Conversion to Chapter 11.