§ 88.5 — Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA

Revised: July 13, 2007

[1]

BAPCPA did not change the general rule in § 1322(a)(2) that a Chapter 13 plan must provide full payment of all claims entitled to priority under § 507.1 But BAPCPA added a new subsection (4) to § 1322(a) that contains this odd mandatory plan provision:

(4) notwithstanding any other provision of this section, a plan may provide for less than full payment of all amounts owed for a claim entitled to priority under section 507(a)(1)(B) only if the plan provides that all of the debtor’s projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.2
[2]

Detailed elsewhere,3 § 507(a)(1)(B) creates a sort of one and one-half priority for allowed, unsecured domestic support obligations (DSOs) assigned to a governmental unit or owed directly to the government, except when the assignment is voluntary and for purposes of collection. New § 1322(a)(4) reads like a permissive (“may”) exception to the full payment of priority claims requirement in § 1322(a)(2) with respect to that narrow class of DSOs assigned or payable to governmental units in five-year plans; but the new section was added to the mandatory (“shall”) provisions of the plan in § 1322(a). Is this simply misplacement by the drafters or is this placement intended to convey something special about this permissive new power?

[3]

The introductory phrase, “notwithstanding any other provision of this section” makes this new mandatory/permissive power a potential exception to all other subsections and subparagraphs in § 1322. This is significant because new § 1322(a)(4) seems to escape the unfair discrimination test for separate classification in § 1322(b)(1) and would not be constrained by the limited authority to provide for the payment of postpetition interest on nondischargeable claims in new § 1322(b)(10).4

[4]

New § 1322(a)(4) permits a Chapter 13 plan to provide less than full payment of a priority claim for a DSO5 that is assigned or owed to or recoverable by a governmental unit described in § 507(a)(1)(B).6 This power is available only if all of the debtor’s “projected disposable income”7 will be applied to payments under the plan for a five-year period. The narrow class of DSOs assigned or payable to a governmental unit described in § 507(a)(1)(B) are priority claims and are also nondischargeable debts in a Chapter 13 case.8 By definition, after BAPCPA, DSOs include interest that accrues after the petition in a Chapter 13 case.9 Chapter 13 debtors want to pay any DSO in full with postpetition interest because any unpaid portion of the DSO survives discharge together with nondischargeable accruing postpetition interest.

[5]

But if the debtor is not financially able to pay all DSOs in full, new § 1322(a)(4) permits an exception to the full payment of priority claims requirement for DSOs assigned or payable to governmental units so long as the plan is a five-year plan and all projected disposable income will be “applied to make payments under the plan.”

[6]

Disposable income is defined in § 1325(b)(2). After BAPCPA, it does not mean the same thing for Chapter 13 debtors with current monthly income (CMI) greater than applicable median family income as it does for debtors with CMI less than median family income.10 Somewhat simplified, for over-median-income debtors, the disposable income test incorporates the abuse provisions of § 707(b)(2)(A) and (B); under § 707(b)(2)(A)(iv), full payment of all priority claims is subtracted from CMI to determine disposable income.11 Chapter 13 debtors with CMI greater than applicable median family income always must propose five-year commitment periods.12

[7]

Section 1325(b)(3) allows an over-median-income Chapter 13 debtor to use the full payment of priority claims to reduce disposable income and § 1322(a)(4) then supports confirmation of a plan that provides less than full payment of DSOs assigned or payable to the government. In other words, for Chapter 13 debtors with CMI over applicable median family income, the amount payable to unsecured creditors (disposable income) is reduced by the full amount of a priority debt that the plan need not pay. Chapter 13 debtors can probably find something useful to do with that money.

[8]

The predicate for use of new § 1322(a)(4) is worded differently than the payment requirement in § 1325(b). Under § 1322(a)(4), the plan can pay less than all of a DSO assigned to a governmental unit if the plan provides that all the debtor’s projected disposable income for a five-year period “will be applied to make payments under the plan.”13 Under § 1325(b)(1)(B), a Chapter 13 plan must provide that all projected disposable income “will be applied to make payments to unsecured creditors under the plan.”14 These phrases do not mean the same things. Was a different test intended? Debtors in plans with five-year commitment periods that satisfy the disposable income test in § 1325(b) will also satisfy the precondition for less than full payment of a DSO assigned or payable to a governmental unit under new § 1322(a)(4). The reverse is not necessarily true—providing that all projected disposable income will be applied to payments under the plan will support less than full payment of an assigned DSO under § 1322(a)(4) but will not necessarily fill the condition for confirmation in § 1325(b)(1)(B).

[9]

A plan provision for less than full payment of a DSO assigned or payable to a governmental unit under new § 1322(a)(4) will often create a separate classification of unsecured claims for purposes of § 1322(b)(1). This will be true whenever there are other priority debts being paid in full, and whenever the assigned DSO is being paid a different percentage from that paid general unsecured claims. The resulting plan contains a classification that ordinarily would be measured against the unfair discrimination standard in § 1322(b)(1).15

[10]

However, the introductory phrase in § 1322(a)(4)—“notwithstanding any other provision of this section”—takes the separate classification of a DSO assigned or payable to a governmental unit out of the unfair discrimination test in § 1322(b)(1). Chapter 13 debtors with five-year plans that satisfy the disposable income test in § 1325(b) can separately classify a DSO assigned or payable to a governmental unit for less than full payment, notwithstanding that other classes of unsecured claims receive less (or more) favorable treatment. Chapter 13 debtors in five-year plans can pay less than all of an assigned DSO even when the assigned DSO is receiving more (or less) than other unsecured claim holders through the plan.

[11]

Similar analysis probably applies to the payment of postpetition interest to the holder of a DSO assigned or payable to a governmental unit, with an additional twist. Ordinarily, postpetition interest on an unsecured debt is not an allowable claim and cannot be paid through a confirmed Chapter 13 plan.16 Mentioned above, BAPCPA expansively defined DSO to include postpetition interest.17 BAPCPA also added a new subsection (10) to § 1322(b) that permits a Chapter 13 debtor to pay postpetition interest accruing on claims that are nondischargeable under § 1328(a).18 DSOs entitled to priority under § 507(a)(1) are nondischargeable claims under § 1328(a)(2) that could be paid postpetition interest under § 1322(b)(10). However, new § 1322(b)(10) contains a limitation that interest may be paid only to the extent the debtor has disposable income after “making provision for full payment of all allowed claims.”19 In other words, under new § 1322(b)(10), a Chapter 13 debtor can pay postpetition interest to the holder of a nondischargeable debt only if the plan otherwise provides for full payment of all allowed claims. The payment of postpetition interest as part of a DSO may be an exception to the limitation in § 1322(b)(10).20

[12]

What if a Chapter 13 debtor in a five-year plan that commits all projected disposable income to payments under the plan wants to pay postpetition interest but less than all of a DSO assigned or payable to a governmental unit? New § 1322(a)(4) says that the debtor can pay less than all of the assigned DSO notwithstanding “any other provision of this section.”21 New § 1322(b)(10) is a “provision of this section.” Arguably, § 1322(a)(4) trumps the limitation in § 1322(b)(10) on the payment of postpetition interest by a Chapter 13 debtor to the governmental unit that holds an assigned DSO but only when the conditions are satisfied in § 1322(a)(4). A Chapter 13 debtor might separately classify a DSO debt assigned to the government for less than payment in full, but with postpetition interest—without running afoul of either § 1322(b)(1) or new § 1322(b)(10).


 

1  11 U.S.C. § 1322(a)(2), discussed in § 98.1 [ Plan Must Provide Full Payment ] § 73.1  Plan Must Provide Full Payment.

 

2  11 U.S.C. § 1322(a)(4).

 

3  See § 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

4  See 11 U.S.C. § 1322(b)(10), discussed in § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

5  11 U.S.C. § 101(14A), discussed in § 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

6  See 11 U.S.C. § 507(a)(1)(B), discussed in § 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA.

 

7  See 11 U.S.C. § 1325(b), discussed beginning at § 92.1  In General.

 

8  See 11 U.S.C. §§ 1328(a) and (b) and 523(a)(5), discussed in §§ 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).

 

9  11 U.S.C. § 101(14A), discussed in § 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

10  See 11 U.S.C. § 1325(b), discussed beginning at § 92.1  In General.

 

11  See 11 U.S.C. § 1325(b)(3), discussed in § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

12  See 11 U.S.C. § 1325(b)(4)(A)(ii), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1  Applicable Commitment Period Calculation.

 

13  11 U.S.C. § 1322(a)(4).

 

14  11 U.S.C. § 1325(b)(1)(B).

 

15  See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

16  See 11 U.S.C. § 502(b)(2).

 

17  11 U.S.C. § 101(14A), mentioned above in this section and discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10) and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

18  11 U.S.C. § 1322(b)(10), discussed in § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

19  See § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

20  See § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

21  11 U.S.C. § 1322(a)(4).