Chapter 13 Plans May Pay Debtors’ Attorneys’ Fees During the Commitment Period Despite a § 1325(b)(1)(B) Objection

Introduction

In City of Chicago v. Ahmed Alayah (Nos. 25-2878 & 25-2879), the Seventh Circuit addressed a recurring Chapter 13 confirmation dispute: when a nonpriority unsecured creditor objects under 11 U.S.C. § 1325(b)(1), may a debtor’s plan still pay the debtor’s bankruptcy counsel during the three-year “applicable commitment period” for below-median-income debtors?

The Debtors-Appellees, Ahmed Alayah and Stephen Falkner, proposed Chapter 13 plans that paid (among other items) trustee fees and their attorneys’ fees during the plan term, before (and in Alayah’s case, alongside) distributions to nonpriority unsecured creditors. One such creditor, the City of Chicago, objected, arguing that § 1325(b)(1)(B) requires all projected disposable income to be paid to unsecured creditors (and that debtor’s counsel either were not “unsecured creditors” or could not be paid absent a proof of claim). The bankruptcy court overruled the objections and confirmed both plans, relying on its prior orders in In re Gordon and In re White. The City appealed, and the Seventh Circuit affirmed.

Summary of the Opinion

The Seventh Circuit held that, even after an objection under § 1325(b)(1), Chapter 13 plans may provide for payment of debtor’s attorneys’ fees during the commitment period. Reading the Code as an integrated scheme, the court emphasized that:

  • Attorneys’ fees for Chapter 13 representation are treated as priority administrative expenses under the statutory cross-references the court cited (§§ 507(a)(2), 503(b)(2), 330(a)(4)(B)), and § 1322(a)(2) requires plans to provide for full payment of priority claims.
  • § 1326(b)(1) mandates that such priority claims be paid “[b]efore or at the time of each payment to creditors under the plan”, which is incompatible with the City’s reading that would effectively bar paying counsel during the commitment period.
  • Counsel can qualify as an “unsecured creditor” in many instances under the Code’s broad definitions of “claim” and “creditor,” and administrative expenses follow a distinct procedural path under § 503(a)—so counsel need not file a proof of claim to be paid.

The court rejected the City’s view that the 2005 BAPCPA amendment to § 1325(b)(1)(B) (“payments to unsecured creditors”) silently displaced decades of Chapter 13 practice.

Analysis

Precedents Cited

The opinion is principally statutory, but it is framed and reinforced by several interpretive and bankruptcy-structure precedents:

  • Hamilton v. Lanning, 560 U.S. 505 (2010): Cited for Chapter 13’s basic architecture, including the role of projected disposable income and the principle that courts should not infer that Congress meant to upend longstanding bankruptcy practice without a clear indication. The Seventh Circuit leaned on Hamilton to resist the City’s claim that BAPCPA worked a “sea change” as to the timing of paying debtor’s counsel.
  • In re Williams, 394 B.R. 550 (Bankr. D. Colo. 2008): Quoted for the description of pre-BAPCPA practice—plans routinely paying priority claims (including administrative expenses such as attorneys’ fees) before distributions to the nonpriority unsecured class. The court used Williams as a factual/legal backdrop to evaluate whether Congress clearly intended to reverse that practice.
  • In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008), abrogated on other grounds by Ransom v. FIA Card Servs., N.A., 562 U.S. 61 (2011): Cited to situate BAPCPA’s “means test” changes for above-median debtors and to explain why Congress might have revised § 1325(b)(1)(B)’s wording—i.e., to clarify how projected disposable income interacts with the post-BAPCPA expense-calculation regime rather than to reorder payments to Chapter 13 counsel for below-median debtors.
  • Johnson v. Home State Bank, 501 U.S. 78 (1991): Cited for the breadth of the Bankruptcy Code’s definition of “claim” (including contingent and unmatured rights to payment). This supported the court’s conclusion that counsel frequently fit within the Code’s “creditor” framework, undermining the City’s categorical assertion that attorneys are not unsecured creditors.
  • In re Dumas, 608 B.R. 902 (Bankr. N.D. Ga. 2019): Cited as collected authority treating attorneys as unsecured creditors and addressing the “double counting” concern (counting fees both as expenses and as plan distributions). The Seventh Circuit used Dumas to demonstrate that courts have navigated these issues without reading § 1325(b)(1)(B) to bar paying counsel during the plan.
  • In re Pajian, 785 F.3d 1161 (7th Cir. 2015): Cited for the general rule that a creditor must file a proof of claim to participate in Chapter 13 distributions. The court distinguished this general principle by pointing to the Code’s specific administrative-expense process under § 503(a).
  • RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012): Cited for the general/specific canon in bankruptcy—where Congress provides a specific mechanism for a specific problem, that provision controls over broader language. The court used RadLAX to justify treating § 503(a) as the tailored procedure for administrative expenses, rather than forcing administrative claimants into the proof-of-claim route.
  • In re Echeman, 378 B.R. 177 (Bankr. S.D. Ohio 2007): Cited (along with Dumas) for the principle that priority unsecured claims should be counted once—“no more, no less”—highlighting the opinion’s caution against double counting attorneys’ fees in disposable-income calculations and plan payments.
  • Bankruptcy court orders: In re Gordon and In re White (Bankr. N.D. Ill. Apr. 25, 2025): These were the bankruptcy court’s immediate bases for overruling Chicago’s objections and were effectively endorsed by the Seventh Circuit’s affirmance, giving those local rulings appellate reinforcement.

Legal Reasoning

The court’s reasoning proceeds in three linked steps: (1) harmonizing statutory provisions governing confirmation and payment priorities; (2) interpreting the 2005 BAPCPA amendment in light of bankruptcy practice and the means-test framework; and (3) rejecting the procedural “proof of claim” objection by distinguishing administrative expenses.

1) The Code’s payment commands control: §§ 1322(a)(2) and 1326(b)(1) require paying counsel during the plan

The City’s theory depended on treating § 1325(b)(1)(B) as a timing prohibition: once an unsecured creditor objects, “projected disposable income” during the commitment period must be routed only to unsecured creditors (and, per the City, not to debtor’s counsel).

The Seventh Circuit refused to read § 1325(b)(1)(B) “in isolation.” It emphasized that:

  • § 1322(a)(2) requires a plan to “provide for the full payment” of claims entitled to priority under § 507, which includes the administrative expenses the court identified as attorneys’ fees via §§ 507(a)(2), 503(b)(2), 330(a)(4)(B).
  • § 1326(b)(1) then dictates when those priority amounts are paid: “Before or at the time of each payment to creditors under the plan.”

Put simply, a construction of § 1325(b)(1)(B) that would prevent paying debtor’s counsel during the commitment period collides with other provisions that affirmatively require paying those fees during plan performance, and often ahead of nonpriority unsecured distributions. The court treated that interlock as decisive.

2) BAPCPA did not clearly displace longstanding Chapter 13 practice

The City relied heavily on BAPCPA’s textual change—from requiring projected disposable income to be applied to “payments under the plan” (pre-2005) to “payments to unsecured creditors under the plan” (post-2005). The City characterized this as a deliberate choice to prevent using projected disposable income for administrative expenses during the commitment period.

The Seventh Circuit read the amendment more narrowly, guided by Hamilton v. Lanning’s caution against inferring a major break with established practice absent clear direction. It stressed that BAPCPA did not amend the provisions that explicitly address attorney compensation and timing (§§ 1322(a)(2), 1326(b)(1), 330(a)(4)(B)).

The court also supplied a functional explanation: BAPCPA’s means-test regime for above-median debtors prescribes allowable expenses and appears to permit deduction of certain secured and priority amounts—including administrative expenses—when calculating disposable income. In that context, the phrase “payments to unsecured creditors” plausibly clarifies that projected disposable income (as newly calculated) is directed to unsecured creditors after those statutorily permitted deductions, rather than rewriting the payment sequencing for counsel—especially for below-median debtors like Alayah and Falkner.

3) Even under § 1325(b)(1)(B), counsel can be paid—and administrative expenses need not be asserted by proof of claim

The court gave two independent answers to the City’s “counsel can’t receive projected disposable income” position:

  • Attorneys’ fees may be “reasonably necessary” for below-median debtors, meaning they may reduce “disposable income” rather than being paid out of it. The court pointed to § 330(a)(4)(B)’s recognition of the “necessity” of such services. (This route eliminates, rather than resolves, any § 1325(b)(1)(B) tension.)
  • Attorneys can qualify as unsecured creditors under the Code’s broad definitions, because a “claim” includes contingent or unmatured rights to payment (§ 101(5)(A)), and “creditor” turns on whether a claim arose at or before the order for relief (§ 101(10)(A)), with the “order for relief” occurring upon filing (§ 301). Citing Johnson v. Home State Bank, the court underscored that “claim” is intentionally expansive.

On the proof-of-claim issue, the court accepted the general proposition reflected in Fed. R. Bankr. P. 3002(a) and In re Pajian, but treated administrative expenses as different because the Code provides a distinct process: § 503(a) permits filing “a request for payment of an administrative expense.” Invoking RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the court applied a general/specific logic: the specific administrative-expense mechanism governs over generalized proof-of-claim practice.

4) The court’s limiting principle: no “double counting”

To prevent windfalls or accounting distortions, the court highlighted an important constraint: attorneys’ fees should be accounted for only once. If treated as a “reasonably necessary” expense (reducing disposable income), they should not also be paid as if they were part of projected disposable income distributions; conversely, if they are paid through plan distributions as priority/administrative amounts, they should not be deducted again in the disposable-income calculation. The court cited In re Echeman and In re Dumas in support.

Impact

  • For Chapter 13 practice in the Seventh Circuit: The decision provides appellate clarity that an objection under § 1325(b)(1) does not, by itself, bar paying debtor’s counsel during the plan term. This substantially reduces leverage for nonpriority unsecured creditors seeking to reorder the payment stream by invoking § 1325(b)(1)(B).
  • For plan drafting and confirmation litigation: Debtors and trustees can continue structuring plans consistent with §§ 1322(a)(2) and 1326(b)(1)—paying priority administrative expenses before or alongside creditor distributions—without fearing that such sequencing is inherently unconfirmable upon objection.
  • For fee procedure and claim administration: The court’s endorsement of the § 503(a) request-for-payment pathway signals that counsel need not file proofs of claim to receive compensation as administrative expenses, though counsel must still comply with whatever timing and application procedures bankruptcy courts impose for fee approval.
  • For statutory interpretation disputes post-BAPCPA: The opinion is a strong reaffirmation of holistic Code interpretation—harmonizing provisions and resisting implied repeals—especially where the alleged “sea change” would conflict with express payment directives like § 1326(b)(1).

Complex Concepts Simplified

  • Projected disposable income: A forward-looking measure of what income a debtor is expected to have available for plan payments after permitted/necessary expenses. If an unsecured creditor objects, § 1325(b)(1)(B) requires that projected disposable income during the commitment period be applied to pay unsecured creditors under the plan (unless the objector is paid in full).
  • Applicable commitment period: The minimum duration the debtor must devote projected disposable income to the plan—generally three years for below-median-income debtors and five years for above-median-income debtors, unless unsecured claims are paid in full sooner.
  • Priority vs. nonpriority unsecured claims: Priority claims are specially favored by statute (listed in § 507) and must be paid in full in Chapter 13 plans. Nonpriority unsecured claims are general unsecured debts without special statutory priority; they often receive only partial payment.
  • Administrative expenses (including attorneys’ fees): Certain postpetition costs of running the bankruptcy case. The opinion treats Chapter 13 debtor’s counsel fees as administrative expenses with priority treatment under the cited sections, and emphasizes the Code’s instruction about their timing of payment.
  • Proof of claim vs. request for payment: A proof of claim is the usual filing a creditor makes to get paid through a bankruptcy case. A request for payment under § 503(a) is a different mechanism designed for administrative expenses; the Seventh Circuit held that this specific process can apply to attorneys’ fees, making a proof of claim unnecessary in that setting.
  • “Double counting”: Counting the same attorneys’ fees twice—once as an expense that reduces disposable income and again as a distribution from projected disposable income. The court warned against this and treated it as the key accounting discipline needed to keep the system coherent.

Conclusion

The Seventh Circuit’s decision establishes a clear rule of confirmation practice: § 1325(b)(1)(B) does not prohibit a Chapter 13 plan from paying debtor’s attorneys’ fees during the applicable commitment period even when a nonpriority unsecured creditor objects. The court grounded that conclusion in the Bankruptcy Code’s integrated structure, particularly §§ 1322(a)(2) and 1326(b)(1), rejected an implied BAPCPA-era overhaul absent clear congressional direction, and clarified that administrative expenses may be pursued through § 503(a) rather than by proof of claim. Going forward, confirmation disputes in the Seventh Circuit should focus less on categorical attacks on paying debtor’s counsel during the plan and more on fee reasonableness, proper classification, and avoiding “double counting” in disposable-income computations.