Background
Ahmed Alayah and Stephen Falkner each filed Chapter 13 bankruptcy petitions in June 2025 and submitted final amended repayment plans in September 2025. Both debtors earned below-median income for Illinois. Alayah’s three-year plan allocated funds to pay secured creditors, priority creditors, the bankruptcy trustee, and his bankruptcy attorneys, leaving only $800 monthly to pay nonpriority unsecured creditors including the City of Chicago (to whom he owed $12,511.66). Falkner’s plan similarly prioritized secured and priority creditors plus attorneys’ fees, leaving no funds for nonpriority unsecured creditors despite owing the City $7,766.10.
The City of Chicago objected to both plans, arguing that allocating projected disposable income to bankruptcy attorneys violated 11 U.S.C. § 1325(b)(1)(B), which requires all disposable income be “applied to make payments to unsecured creditors.” The City contended that attorneys are not unsecured creditors, and alternatively, that attorneys could not receive payment without filing a formal proof of claim. The bankruptcy court confirmed both plans, relying on prior case law treating bankruptcy attorneys as unsecured creditors eligible to receive payment.
The City appealed to the Seventh Circuit, challenging whether the bankruptcy court could confirm plans that allocated disposable income to attorneys’ fees while objecting unsecured creditors remained unpaid.
The Court’s Holding
The Seventh Circuit affirmed, holding that Chapter 13 plans properly allocate funds to pay bankruptcy attorneys’ fees during the commitment period. The court reasoned that § 1325(b)(1)(B) cannot be read in isolation. Instead, other Code sections mandate attorney payment priority: § 1322(a)(2) requires plans to provide full payment of all priority claims (including attorneys’ fees under §§ 507(a)(2) and 503(b)(2)), and § 1326(b)(1) specifies that priority claims “shall be paid before or at the time of each payment to creditors under the plan.” These provisions establish that attorneys’ fees must be paid before or simultaneously with nonpriority unsecured claims.
The court rejected the City’s argument that the 2005 BAPCPA amendment to § 1325(b)(1)(B) prohibited paying attorneys before nonpriority creditors. Applying the principle that the Bankruptcy Code should not be read to erode past practice without clear congressional intent, the court found no indication Congress intended to displace the decades-old practice of prioritizing attorney fees. The amendment appeared narrowly tailored to address the means test for above-median debtors, not to alter attorney payment timing for below-median debtors.
The court further held that bankruptcy attorneys qualify as unsecured creditors capable of receiving projected disposable income under § 1325(b)(1)(B), and need not file a formal proof of claim. Instead, attorneys may request payment as an administrative expense under § 503(a). The court emphasized that a plan must account for attorneys’ fees only once—either as a deducted reasonably necessary expense or as a direct claim payment, but not both.
Key Takeaways
- Chapter 13 plans may allocate projected disposable income to pay bankruptcy attorneys’ fees during the commitment period, even when nonpriority unsecured creditors object.
- The Bankruptcy Code mandates that attorneys’ fees, as priority claims, be paid before or contemporaneously with payments to nonpriority unsecured creditors under §§ 1322(a)(2) and 1326(b)(1).
- Bankruptcy attorneys qualify as unsecured creditors and may receive payment without filing a formal proof of claim; they may instead request payment as an administrative expense.
- The 2005 BAPCPA amendment did not eliminate the longstanding practice of prioritizing attorneys’ fees over nonpriority unsecured creditors’ claims.
Why It Matters
This decision protects debtors’ ability to compensate bankruptcy counsel adequately during Chapter 13 repayment, ensuring access to competent legal representation without forcing attorneys to defer compensation until after nonpriority creditors are paid. The ruling also resolves ambiguity created by BAPCPA’s 2005 amendments and clarifies that bankruptcy attorneys hold claim rights as unsecured creditors entitled to priority administrative expense treatment.
For nonpriority unsecured creditors, the decision confirms they cannot prevent debtors from paying legal fees through the plan. The ruling preserves § 1325(b)(1)(B) protections by clarifying that attorneys’ fees are paid from a separate statutory priority rather than from amounts designated for unsecured creditors, maintaining the statutory framework that governed Chapter 13 before BAPCPA.