Background
Ahmed Alayah and Stephen Falkner each filed Chapter 13 bankruptcies in June 2025 and submitted amended repayment plans in September 2025. Both debtors were Illinois residents with below-median incomes. Their plans allocated net monthly income to secured creditors, priority claims, trustee fees, and bankruptcy attorneys’ fees. Alayah’s plan left $800 monthly for nonpriority unsecured creditors; Falkner’s plan left nothing. Both debtors owed the City of Chicago money as nonpriority unsecured creditors (Alayah: $12,511.66; Falkner: $7,766.10).
The City of Chicago objected to plan confirmation on two grounds: first, that allocating funds to attorneys’ fees violated 11 U.S.C. § 1325(b)(1)(B), which requires that “all of the debtor’s projected disposable income to be received in the applicable commitment period…will be applied to make payments to unsecured creditors under the plan”; and second, that bankruptcy attorneys are not unsecured creditors, so they cannot receive any projected disposable income. Alternatively, the City argued that even if attorneys are unsecured creditors, the debtors’ counsel were ineligible because they never filed a proof of claim.
The bankruptcy court overruled the City’s objections and confirmed both plans, relying on its prior reasoning in similar cases (In re Gordon and In re White). The City appealed to the Seventh Circuit.
The Court’s Holding
The Seventh Circuit affirmed, holding that Chapter 13 plans may allocate projected disposable income to pay bankruptcy attorneys’ fees before paying nonpriority unsecured creditors, even when an unsecured creditor objects. The court rejected the City’s argument that § 1325(b)(1)(B) prohibits such payments. Reading the Bankruptcy Code as a whole, the court found that § 1322(a)(2) requires plans to provide full payment of all priority claims (including attorneys’ fees under 11 U.S.C. § 507(a)(2)), and § 1326(b)(1) mandates that priority claims be paid “before or at the time of each payment to creditors under the plan.” These provisions make clear that attorneys’ fees must be paid during the commitment period.
The court treated the 2005 amendment to § 1325(b)(1)(B) (BAPCPA) as narrowly targeted at above-median debtors subject to the “means test,” not a wholesale elimination of decades-old practice. Following the Supreme Court’s instruction in Hamilton v. Lanning not to erode past bankruptcy practice absent clear congressional intent, the court found no indication that Congress meant to displace the longstanding practice of paying attorneys’ fees before nonpriority unsecured claims. The added phrase “to unsecured creditors” reflected an accounting change for means-test calculations, not a restriction on when fees could be paid.
The court identified two paths by which attorneys’ fees can be paid without violating § 1325(b)(1)(B): attorneys’ fees may be treated either as a “reasonably necessary expense” under § 1325(b)(2)(A)—meaning they are deducted before calculating projected disposable income—or as an unsecured claim qualifying as a “creditor” under the Bankruptcy Code, which defines “creditor” broadly to include any entity with a claim that arose before the order for relief. The court also held that attorneys need not file a formal proof of claim; they may file a request for payment of an administrative expense under 11 U.S.C. § 503(a). Finally, the court cautioned that attorneys’ fees must be accounted for only once in the plan to avoid double-counting.
Key Takeaways
- Chapter 13 repayment plans must allocate funds to pay bankruptcy attorneys’ fees, which courts may confirm even when nonpriority unsecured creditors object and receive little or no payment.
- Bankruptcy attorneys qualify as creditors under the broad statutory definition and can receive projected disposable income without filing a proof of claim; an administrative expense request under § 503(a) suffices.
- The 2005 BAPCPA amendment to § 1325(b)(1)(B) did not overturn the historical practice of prioritizing attorneys’ fees before nonpriority unsecured claims; it was a narrower change targeting above-median debtors’ means-test calculations.
- Attorneys’ fees may be accounted for as a “reasonably necessary expense” deducted before disposable income is calculated, or as an unsecured claim entitled to payment from disposable income—but not both.
Why It Matters
This decision protects individual debtors’ access to legal counsel in Chapter 13 bankruptcy by ensuring that attorneys can be compensated from repayment plan income. Below-median income debtors (the typical Chapter 13 filers) can now proceed with confirmed plans that prioritize attorney compensation, even when disposable income is limited and unsecured creditors receive minimal or no payment. The court’s reading of the Bankruptcy Code preserves the payment hierarchy established by Congress: secured creditors, then priority claims (including administrative expenses like attorneys’ fees), then nonpriority unsecured creditors.
The decision resolves a circuit interpretation of how BAPCPA’s 2005 amendment affects attorney compensation in Chapter 13 plans. By holding that Congress did not intend to disrupt decades of bankruptcy practice, the Seventh Circuit provides certainty to bankruptcy practitioners and debtors that counsel fees will be paid during the plan term, removing a significant barrier to meaningful legal representation in consumer bankruptcies.