Seventh Circuit: § 1325(b)(1)(B) Does Not Bar Paying Chapter 13 Debtors’ Attorneys’ Fees During the Commitment Period, and Administrative Fees Need Not Be Paid via Proof of Claim

1. Introduction

In City of Chicago v. Stephen Falkner (consolidated with an appeal in In re Ahmed Alayah), the Seventh Circuit addressed a recurring confirmation dispute in Chapter 13 practice: whether, after an objection by a nonpriority unsecured creditor, a debtor’s plan may pay the debtor’s bankruptcy counsel during the “applicable commitment period” without violating the “projected disposable income” requirement of 11 U.S.C. § 1325(b)(1)(B).

The objecting creditor—the City of Chicago—argued that the statute requires all projected disposable income to be applied to payments to unsecured creditors, and that debtor’s counsel either (i) is not an unsecured creditor and therefore cannot be paid from projected disposable income, or (ii) even if counsel is an unsecured creditor, counsel cannot be paid absent a filed proof of claim.

The debtors, Ahmed Alayah and Stephen Falkner, were below-median Illinois debtors proposing three-year plans. Each plan prioritized payment of trustee fees and debtor’s counsel fees during the plan term, with Alayah proposing some distribution to nonpriority unsecured creditors and Falkner proposing none.

2. Summary of the Opinion

The Seventh Circuit affirmed confirmation of both plans. The court held that the Bankruptcy Code—read as an integrated scheme—requires Chapter 13 plans to provide for payment of debtor’s counsel fees (as priority administrative expenses) and to pay those fees before or at the time of payments to other creditors under the plan. Accordingly, the court rejected the City’s view that § 1325(b)(1)(B) forbids paying counsel during the commitment period when an unsecured creditor objects.

The court also rejected the City’s proof-of-claim argument, explaining that administrative expenses follow a distinct statutory procedure: 11 U.S.C. § 503(a) permits a request for payment of an administrative expense, and that mechanism can support payment without a filed proof of claim.

3. Analysis

3.1. Precedents Cited

Hamilton v. Lanning

The court leaned on Hamilton v. Lanning for two major interpretive guideposts. First, Lanning supplies the structural account of Chapter 13’s confirmation framework—especially how § 1325(b) becomes operative only upon objection by the trustee or an unsecured creditor. Second, the opinion quoted Lanning for a crucial caution against inferring congressional intent to upend established bankruptcy practice without clarity: courts should not “read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.” That principle became central to the Seventh Circuit’s view that the 2005 amendment to § 1325(b)(1)(B) did not silently eliminate the long-standing practice of paying Chapter 13 counsel fees during plan performance.

In re Williams

The City relied on In re Williams to frame BAPCPA as a “sea change,” highlighting the historical practice (pre-2005) of paying priority and administrative expenses (including attorney’s fees) before distributing to nonpriority unsecured creditors. The Seventh Circuit did not dispute the historical account reflected in Williams; instead, it used that history to conclude that displacing it would require clearer statutory direction than the City could identify.

In re Ross-Tousey

The panel cited In re Ross-Tousey for the proposition that BAPCPA introduced a “means test” architecture that particularly reshaped expense calculations for above-median debtors. This supported the court’s narrower view of why Congress revised § 1325(b)(1)(B): not to alter attorney-fee timing, but to align the projected-disposable-income regime with BAPCPA’s new expense-calculation rules for certain debtors.

Ransom v. FIA Card Servs., N.A.

Ransom v. FIA Card Servs., N.A. appeared in the opinion to note that Ross-Tousey was “abrogated on other grounds,” underscoring that the cited aspect of Ross-Tousey—BAPCPA’s means-test orientation—remains relevant for contextual interpretation even if other holdings are no longer good law.

Johnson v. Home State Bank

The court cited Johnson v. Home State Bank to emphasize the breadth of the Bankruptcy Code’s definition of “claim” as a “right to payment,” including contingent and unmatured rights. That breadth underwrote the Seventh Circuit’s conclusion that, depending on when the right to payment accrues, debtor’s counsel can fit comfortably within “creditor”/“claim” concepts and thus within the universe of “unsecured creditors” referenced by § 1325(b)(1)(B).

In re Dumas

The panel relied on In re Dumas for the proposition that courts have treated debtor’s attorneys as unsecured creditors in this context and to support the broader point that administrative expenses can be conceptualized as unsecured claims for distributional purposes. Dumas was also invoked later (with other authority) to warn against “double counting” attorney’s fees—deducting them as expenses and also paying them again from projected disposable income.

In re Pajian

The City invoked a familiar Chapter 13 distribution principle—“file a proof of claim to get paid”—and the court acknowledged that general rule via In re Pajian. But the Seventh Circuit distinguished the proof-of-claim regime by pointing to the separate statutory channel for administrative expenses under § 503(a).

RadLAX Gateway Hotel, LLC v. Amalgamated Bank

The court cited RadLAX Gateway Hotel, LLC v. Amalgamated Bank for the “general/specific canon” and for the broader interpretive sensibility that the Bankruptcy Code is a comprehensive, problem-specific scheme. That supported the move from the general proof-of-claim requirement in the Bankruptcy Rules to the more specific administrative-expense request mechanism in the Code.

In re Echeman

In re Echeman was cited (along with treatise commentary and Dumas) for the practical accounting point: priority claims and administrative expenses should be counted once in determining what remains for nonpriority unsecured creditors.

In re Gordon; In re White

The bankruptcy court had overruled Chicago’s objections by adopting its reasoning from In re Gordon and In re White, which resolved the same issue in the Northern District of Illinois. The Seventh Circuit’s affirmance effectively validates that approach within the circuit, giving those orders enhanced persuasive (and, practically, precedential) force for local Chapter 13 practice.

3.2. Legal Reasoning

(a) Statutory harmonization: § 1325(b)(1)(B) cannot be read to nullify §§ 1322(a)(2) and 1326(b)(1)

The City’s argument depended on reading § 1325(b)(1)(B) as a rigid command that, upon objection, every dollar of projected disposable income must be routed to nonpriority unsecured creditors (or at least not to debtor’s counsel). The Seventh Circuit rejected that approach because the Code elsewhere affirmatively requires payment of counsel fees as priority administrative expenses:

  • 11 U.S.C. § 1322(a)(2): a plan “shall provide for the full payment” of claims entitled to priority under § 507.
  • 11 U.S.C. §§ 507(a)(2), 503(b)(2), 330(a)(4)(B): together place debtor’s counsel compensation within priority administrative expenses.
  • 11 U.S.C. § 1326(b)(1): priority claims “shall be paid” “[b]efore or at the time of each payment to creditors under the plan.”

From those provisions, the court drew a simple but dispositive conclusion: Chapter 13 plans must provide for the payment of debtor’s counsel fees in a manner that occurs before or contemporaneously with payments to other creditors. An interpretation of § 1325(b)(1)(B) that categorically forbids paying counsel during the commitment period would force direct conflict with the Code’s timing directive in § 1326(b)(1). The court therefore read § 1325(b) in a way that preserves the operation of the attorney-fee provisions rather than impliedly repealing them.

(b) BAPCPA’s 2005 change to § 1325(b)(1)(B) did not clearly displace settled Chapter 13 fee practice

The opinion carefully parsed the 2005 amendment: the phrase changed from “payments under the plan” to “payments to unsecured creditors under the plan.” The City argued this necessarily barred payment of attorneys’ fees (viewed as outside the “unsecured creditor” class) during the commitment period.

The Seventh Circuit found that reading implausible for two reasons. First, Congress left untouched the provisions that expressly require and time the payment of attorney’s fees. Second, the court offered a coherent alternative explanation for the textual tweak: it may have been designed to accommodate BAPCPA’s means-test framework (especially for above-median debtors), where certain secured and priority payments can affect projected disposable income calculations.

Importantly, the court treated the amendment as, at most, an “accounting” clarification, not an instruction to reorder the timing of administrative expense payments for below-median debtors.

(c) Even on the City’s narrow framing, counsel fees can fit within § 1325(b)(1)(B)

The court explained multiple paths by which counsel fees can be consistent with § 1325(b)(1)(B), even if one temporarily brackets the broader harmonization with §§ 1322 and 1326:

  • Fees as “reasonably necessary” expenses (below-median debtors): the court saw “no reason” attorney’s fees could not qualify as reasonably necessary, pointing to § 330(a)(4)(B) (which authorizes “reasonable” compensation due to the “necessity” of services to the debtor). If treated as reasonably necessary expenditures, the amounts would not be part of “projected disposable income” in the first place.
  • Fees as payments to an “unsecured creditor”: using the Code’s broad definitions of “claim” and “creditor,” the court reasoned that attorneys can be “unsecured creditors” where they hold an unsecured right to payment that arises at or before the order for relief (the petition filing), including contingent or unmatured rights—an analysis supported by Johnson v. Home State Bank.

(d) Proof of claim vs. administrative-expense request

Addressing the City’s fallback argument, the court acknowledged the general procedural rule in Fed. R. Bankr. P. 3002(a) and its own precedent in In re Pajian requiring a proof of claim to participate in Chapter 13 distributions. But it held that administrative expenses are treated differently under the Code itself: 11 U.S.C. § 503(a) authorizes an entity to file a request for payment of an administrative expense, and that is the relevant mechanism for attorney’s fees as administrative expenses. Applying the “general/specific” principle referenced through RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the court refused to impose a rigid proof-of-claim requirement where the Code supplies a more tailored process.

(e) The anti-double-counting caution

While affirming the plans, the court added an important limiting principle: attorney’s fees must be accounted for only once. If fees are deducted from income as reasonably necessary expenses, they should not also be paid again as a distribution from projected disposable income. The court cited treatise guidance and decisions including In re Echeman and In re Dumas to emphasize that “priority unsecured claims can be counted once, no more, no less.”

3.3. Impact

The decision has immediate operational consequences for Chapter 13 practice in the Seventh Circuit:

  • Plan feasibility and access to counsel: By confirming that debtor’s counsel may be paid during the plan term (and, under § 1326(b)(1), before or alongside other creditor payments), the opinion protects the economic viability of representing Chapter 13 debtors—especially below-median debtors who may not be able to pay meaningful fees up front.
  • Limits creditor leverage via § 1325(b) objections: Unsecured creditors cannot use § 1325(b)(1)(B) objections to force debtor’s counsel to wait until after the commitment period (or to go unpaid) as a condition of confirmation.
  • Clarifies the administrative-expense pathway: The court’s acceptance of § 503(a) requests (as opposed to a strict proof-of-claim requirement) provides a doctrinally grounded response to a common procedural objection and should reduce litigation over fee payment mechanics—though local rules, forms, and standing orders may still shape how requests are made.
  • Encourages cleaner plan accounting: The anti-double-counting instruction gives trustees and courts a concrete auditing principle when reviewing disposable-income calculations and fee treatment.

More broadly, the opinion models an interpretive method likely to influence future disputes: a resistance to reading one provision (§ 1325(b)) as silently overriding the Code’s specific, practice-defining directives for administrative expenses (§§ 1322(a)(2), 1326(b)(1), and § 330).

4. Complex Concepts Simplified

  • “Projected disposable income”: a forward-looking estimate of the debtor’s income available for plan payments after subtracting allowed/necessary expenses (with different rules for below-median and above-median debtors).
  • “Applicable commitment period”: the minimum length of the plan term for purposes of the projected-disposable-income requirement—typically three years for below-median debtors and five years for above-median debtors (subject to statutory qualifications).
  • Priority vs. nonpriority unsecured claims: “priority” claims are listed in § 507 and must be paid in full in Chapter 13; “nonpriority unsecured” claims are general unsecured debts that share pro rata in whatever remains.
  • Administrative expenses (including debtor’s attorney’s fees): costs of administering the bankruptcy case, treated with special statutory priority and special payment procedures (including requests under § 503).
  • Proof of claim vs. request for payment: a proof of claim is the usual mechanism for creditors to be paid from the estate; a request for payment under § 503 is the Code’s mechanism for administrative expenses—distinct from (and not necessarily dependent on) the proof-of-claim process.
  • Anti-double-counting principle: the same obligation (here, attorney’s fees) should not reduce disposable income as an “expense” and also be paid again from the post-expense disposable-income pool.

5. Conclusion

The Seventh Circuit’s decision confirms a practical and doctrinally integrated rule: § 1325(b)(1)(B) does not prohibit Chapter 13 plans from paying debtor’s counsel fees during the commitment period, because the Bankruptcy Code itself requires those fees—treated as priority administrative expenses—to be paid before or at the time of payments to other creditors under the plan. The court further held that payment of such administrative expenses need not depend on a traditional proof of claim where § 503(a) supplies a dedicated request procedure. Going forward, unsecured-creditor objections under § 1325(b) cannot be used to reorder or obstruct the statutorily protected treatment of Chapter 13 administrative fees, though courts and trustees must ensure attorney’s fees are accounted for only once in disposable-income mathematics.