City of Chicago v. Stephen Falkner

• Court: Court of Appeals for the Seventh Circuit
• Decided: June 10, 2026
• Docket: 25-2878
• Status: Published
• Author: Scudder

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________ Nos. 25-2878 & 25-2879 IN RE: STEPHEN FALKNER and AHMED ALAYAH, Debtors-Appellees, APPEALS OF: CITY OF CHICAGO. ____________________

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division-BK. Nos. 25-09387 & 25-09060 — Donald R. Cassling, Bankruptcy Judge. ____________________

ARGUED MAY 18, 2026 — DECIDED JUNE 10, 2026 ____________________

Before SCUDDER, KIRSCH, and TAIBLESON, Circuit Judges. SCUDDER, Circuit Judge. Ahmed Alayah and Stephen Falk- ner filed for Chapter 13 bankruptcy. Their repayment plans promised to pay their attorneys’ fees before paying debts owed to nonpriority unsecured creditors. One nonpriority unsecured creditor, the City of Chicago, objected to the plans. It contended that paying the attorneys first violated 11 U.S.C. § 1325(b)(1)(B), which allows a court to confirm an objected- to plan when it “provides that all of the debtor’s projected dis- posable income … will be applied to make payments to unse- cured creditors under the plan.” The bankruptcy court 2 Nos. 25-2878 & 25-2879

overruled the City’s objections and confirmed the plans. We affirm. I A Alayah filed a Chapter 13 bankruptcy petition in June 2025. A few months later, in September 2025, he filed his final amended debt repayment plan. His plan proposed using his net monthly income over the course of three years to pay se- cured creditors for two car loans, various priority creditors for certain debts, the bankruptcy trustee’s fee, and his bank- ruptcy attorneys’ fees. His plan specified that the remaining $800 of net income would go to nonpriority unsecured credi- tors like the City of Chicago on a pro rata basis. Alayah lives in Illinois and earns a below-median income. He owes the City $12,511.66. Falkner similarly filed a Chapter 13 bankruptcy petition in June 2025 and his final amended debt repayment plan in Sep- tember 2025. His plan proposed using his net monthly income over the course of three years to pay a secured creditor for a car loan, the bankruptcy trustee’s fee, and his bankruptcy at- torneys’ fees. His plan clarified that he would have no net in- come left to pay nonpriority unsecured creditors like the City of Chicago. Falkner, too, lives in Illinois and earns a below- median income. He owes the City $7,766.10. B The City objected to the confirmation of Alayah’s and Falkner’s plans. It took issue with the fact that the plans allo- cated funds to pay attorneys’ fees during the three-year com- mitment period. Chicago contended that this violated 11 U.S.C. § 1325(b)(1)(B), which allows a bankruptcy court to Nos. 25-2878 & 25-2879 3

confirm a plan following an objection by an unsecured credi- tor if “the plan provides that all of the debtor’s projected dis- posable income to be received in the applicable commitment period … will be applied to make payments to unsecured creditors under the plan.” The City insisted that bankruptcy attorneys are not unsecured creditors, so they cannot receive any projected disposable income. Alternatively, the City con- tended that even if bankruptcy attorneys are unsecured cred- itors, Alayah’s and Falkner’s attorneys were out of luck be- cause they never filed any proof of claim. The bankruptcy court confirmed Alayah’s and Falkner’s plans, overruling Chicago’s objections. It adopted its reason- ing from prior cases resolving the same issue. See Order, In re Gordon, No. 24-bk-18109 (Bankr. N.D. Ill. Apr. 25, 2025), Dkt. 30; Order, In re White, No. 24-bk-18215 (Bankr. N.D. Ill. Apr. 25, 2025), Dkt. 34. In those cases, the bankruptcy court deter- mined that the debtors’ attorneys were unsecured creditors who could share in projected disposable income without vio- lating § 1325(b)(1)(B). It also concluded that they did not need to file a proof of claim to receive payment. The City of Chicago now appeals. II A “Chapter 13 of the Bankruptcy Code provides bankruptcy protection to ‘individual[s] with regular income’ whose debts fall within statutory limits.” Hamilton v. Lanning, 560 U.S. 505, 508 (2010) (quoting 11 U.S.C. §§ 101(30), 109(e)). “Unlike debt- ors who file under Chapter 7 and must liquidate their nonex- empt assets in order to pay creditors, Chapter 13 debtors are permitted to keep their property, but they must agree to a 4 Nos. 25-2878 & 25-2879

court-approved plan under which they pay creditors out of their future income.” Id. (cleaned up). “A bankruptcy trustee oversees the filing and execution of a Chapter 13 debtor’s plan.” Id. Chapter 13 classifies three types of claims that a debtor might owe to a creditor. See W. Homer Drake, Jr., Paul W. Bonapfel & Adam Goodman, Chapter 13 Practice & Procedure § 3.2 (2d ed. 2025). Generally, a creditor has a secured claim when it has a lien on the debtor’s property “that the creditor can enforce to subject the encumbered property to payment of the debt.” Id. (citing 11 U.S.C. § 506(a)). A creditor has a priority claim when it is listed in § 507(a). See id. And a cred- itor has a nonpriority unsecured claim if it is “not secured by a nonavoidable lien and is not a priority claim.” Id. A bankruptcy court “shall confirm” a Chapter 13 repay- ment plan if it meets certain statutory conditions. 11 U.S.C. § 1325(a). Among other requirements, the plan must comply with the provisions of Chapter 13, it must come after specific fees have “been paid,” and it must have been “proposed in good faith.” Id. § 1325(a)(1)–(3). But additional rules apply when “an unsecured creditor or the bankruptcy trustee objects to confirmation.” Hamilton, 560 U.S. at 508. When that happens, “the court may not ap- prove the plan” unless it pays the objecting unsecured credi- tor in full, 11 U.S.C. § 1325(b)(1)(A), or “the plan provides 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,” id. § 1325(b)(1)(B). Nos. 25-2878 & 25-2879 5

The “applicable commitment period” depends on the debtor’s income level. For debtors who make at least the me- dian income for their state, the commitment period is five years. See id. § 1325(b)(4)(A). For debtors with below-median incomes, the commitment period is three years. See id. None- theless, “if the plan provides for payment in full of all allowed unsecured claims over a shorter period,” the commitment pe- riod “may be less than 3 or 5 years.” Id. § 1325(b)(4)(B). The Bankruptcy Code does not define the term “projected disposable income.” Hamilton, 560 U.S. at 509. But Congress did define “disposable income” as the “‘current monthly in- come received by the debtor’ less ‘amounts reasonably neces- sary to be expended’ for the debtor’s maintenance and sup- port, for qualifying charitable contributions, and for business expenditures.” Id. (quoting 11 U.S.C. § 1325(b)(2)(A)(i)–(ii)). “Current monthly income” generally refers to the average of “the debtor’s monthly income during … the six full months preceding the filing of the bankruptcy petition.” Id. (citing 11 U.S.C. § 101(10A)(A)(i)). And the phrase “amounts reasona- bly necessary to be expended” once again depends on the debtor’s income level. “For a debtor whose income is below the median for his or her State, the phrase includes the full amount needed for ‘maintenance or support,’ but for a debtor with income that exceeds the state median, only certain spec- ified expenses are included.” Id. (citing 11 U.S.C. §§ 1325(b)(2)(A)(i), (b)(3)(A), 707(b)(2)). B The City contends that following an objection, Chapter 13 plans may not allocate funds to pay for attorneys’ fees during a commitment period. It points to § 1325(b)(1)(B), which pro- hibits a court from confirming a plan that does not pay an 6 Nos. 25-2878 & 25-2879

objecting unsecured creditor’s claim in full unless “the plan provides 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.” The City insists that Chapter 13 counsel are not unse- cured creditors, so they cannot receive any of the debtor’s pro- jected disposable income without violating § 1325(b)(1)(B). But we cannot read § 1325(b)(1)(B) in isolation. The Bank- ruptcy Code as a whole makes clear that Chapter 13 plans may provide payments for attorneys’ fees during a commit- ment period. Indeed, it requires plans to do just that. Section 1322(a)(2) provides that a plan “shall provide for the full pay- ment … of all claims entitled to priority under section 507,” including attorneys’ fees, see 11 U.S.C. §§ 507(a)(2), 503(b)(2), 330(a)(4)(B). And, for its part, § 1326(b)(1) clarifies when that payment must occur. It mandates that priority claims, includ- ing attorneys’ fees, see id. §§ 507(a)(2), 503(b)(2), 330(a)(4)(B), “shall be paid” “[b]efore or at the time of each payment to creditors under the plan,” id. § 1326(b)(1). As a result, Chapter 13 plans must provide for the payment of attorneys’ fees be- fore or at the same time as any payments to nonpriority unse- cured creditors during the commitment period. Cf. 8 Collier on Bankruptcy ¶ 1325.11(4)(c)(i) (16th ed. 2026) (“[I]nterpreting section 1325(b) to preclude payment of administrative ex- penses would place it in direct conflict with section 1326(b)….”). Some additional statutory background helps explain our reasoning. Congress added the current language of § 1325(b)(1)(B) in the Bankruptcy Abuse Prevention and Con- sumer Protection Act of 2005. See Pub. L. No. 109-8, § 102(h)(1), 119 Stat. 23, 33. The bankruptcy community refers Nos. 25-2878 & 25-2879 7

to the amendment by the shorthand “BAPCPA.” The prior version of § 1325(b)(1)(B) allowed a court to approve a Chap- ter 13 plan following an objection from an unsecured creditor if “all of the debtor’s projected disposable income to be re- ceived” in a given period of time was going to be “applied to make payments under the plan.” 11 U.S.C. § 1325(b)(1)(B) (2000 ed.). But today “all of the debtor’s projected disposable income” must be “applied to make payments to unsecured creditors under the plan.” 11 U.S.C. § 1325(b)(1)(B) (emphasis added). The City contends that the 2005 amendment marked a sea change for Chapter 13 attorneys’ fees. Before the amendment, “Chapter 13 plans routinely paid the debtor’s net income fig- ure first toward priority claims in the order set forth in § 507— which included both prepetition claims … and postpetition or administrative expenses (such as attorney’s fees and trustee’s compensation)—and then applied the balance to the nonpri- ority unsecured creditor class.” In re Williams, 394 B.R. 550, 563 (Bankr. D. Colo. 2008). But after the amendment, Chicago tells us, plans may no longer pay attorneys’ fees before paying nonpriority unsecured creditors during the commitment pe- riod. We view Congress’s 2005 amendment as more limited. The Supreme Court has instructed us not to “read the Bank- ruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.” Hamil- ton, 560 U.S. at 517 (cleaned up). And nothing in the amend- ment suggests Congress meant to displace the decades-old practice of Chapter 13 plans providing for payment of attor- neys’ fees prior to nonpriority unsecured claims. Section 1325(b)(1) on its own says nothing about when debtors should 8 Nos. 25-2878 & 25-2879

pay their attorneys. And BAPCPA left untouched the Code sections requiring debtors to pay attorneys’ fees before or at the same time as nonpriority unsecured claims. See 11 U.S.C. §§ 1322(a)(2), 1326(b)(1); see also id. § 330(a)(4)(B). As we see it, Congress seems to have amended § 1325(b)(1)(B) to account for BAPCPA’s changes to Chapter 13 for above-median debtors. BAPCPA subjected above-me- dian debtors to a “means test,” In re Ross-Tousey, 549 F.3d 1148, 1151 (7th Cir. 2008), abrogated on other grounds by Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 68 & n.4, in which Con- gress prescribed what counts as a reasonably necessary ex- pense, see 11 U.S.C. § 707(b)(2)(A)(ii)–(iv). The means test ap- pears to allow above-median debtors to deduct secured claims and priority claims, including administrative expenses like attorneys’ fees, as reasonably necessary expenses when calculating their projected disposable income. See 11 U.S.C. §§ 1325(b)(3), 707(b)(2)(A)(iv), 707(b)(2)(A)(iii), 507(a)(2), 503(b)(2), 330(a)(4)(B); see also 8 Collier on Bankruptcy ¶ 1325.11(4)(c)(i) (confirming this understanding). Congress therefore may have modified § 1325(b)(1)(B) to clarify that above-median debtors only needed to use their projected dis- posable income to make “payments to unsecured creditors.” 11 U.S.C. § 1325(b)(1)(B). To be sure, Congress could have been clearer about the amendment’s implications for below- median debtors. But we ultimately see no statutory indication that it aimed to use this accounting change to delay or other- wise change the timing of payments to below-median debt- ors’ attorneys. The City’s reading falls short even if we focus on § 1325(b)(1)(B) in isolation. As an initial matter, we see no rea- son why attorneys’ fees could not count as a reasonably Nos. 25-2878 & 25-2879 9

necessary expense for below-median debtors. After all, the Code authorizes “reasonable” compensation to attorneys for bankruptcy work in part because of the “necessity of such ser- vices to the debtor.” Id. § 330(a)(4)(B). Treating these fees as a reasonably necessary expense would mean that the money would not come from a debtor’s projected disposable income, resolving any tension with § 1325(b)(1)(B). See Drake, Bonap- fel, Goodman, Chapter 13 Practice & Procedure § 8.29 (“[T]he definition of expenditures for the maintenance and support of a debtor and her dependents under Code § 1325(b)(2)(A) must of necessity be expanded to include deductions for pay- ment of secured and priority claims under the plan.”). Regardless, even if that impression is mistaken and the fees are not a reasonably necessary expense, bankruptcy at- torneys will often count as unsecured creditors who can re- ceive projected disposable income under the terms of § 1325(b)(1)(B). The Code defines “creditor” as an “entity that has a claim against the debtor that arose at the time of or be- fore the order for relief concerning the debtor.” 11 U.S.C. § 101(10)(A). The phrase “order for relief” refers to the filing of a Chapter 13 bankruptcy petition. Id. § 301. And a “claim” is a “right to payment,” even if it is “contingent” or “unma- tured.” Id. § 101(5)(A). Given the Code’s statutory definitions, it stands to reason that any lawyer who accrues an unsecured right to payment before the debtor files a Chapter 13 bankruptcy petition would qualify as an unsecured creditor who would then be able to receive projected disposable income. See Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (“Congress intended by this language to adopt the broadest available definition of ‘claim.’”); 8 Collier on Bankruptcy ¶ 1325.11(4)(c)(i) (“[C]ourts 10 Nos. 25-2878 & 25-2879

will hopefully recognize that an administrative expense is an unsecured claim and … section 1325(b) requires funds … to be paid to ‘unsecured creditors’ generally, not just nonprior- ity creditors.”); see also In re Dumas, 608 B.R. 902, 909 (Bankr. N.D. Ga. 2019) (collecting cases treating attorneys as unse- cured creditors). Further, bankruptcy attorneys may receive payments as unsecured creditors without filing a proof of claim. It is true that the Rules of Bankruptcy Procedure provide that gener- ally “every creditor must file a proof of claim … for the claim … to be allowed.” Fed. R. Bankr. P. 3002(a); see also In re Pa- jian, 785 F.3d 1161, 1163 (7th Cir. 2015) (“A creditor must file a proof of claim in order to participate in Chapter 13 plan dis- tributions.”). But the Bankruptcy Code specifically contem- plates a separate procedure for administrative expenses, stat- ing that “[a]n entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.” 11 U.S.C. § 503(a). That pro- cedure applies here. In short, we see no hard-and-fast rule requiring attorneys to file a proof of claim to receive payment. Cf. RadLAX Gate- way Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012) (applying the general/specific canon to the Bankruptcy Code in part because “Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions” (cleaned up)). Creditors may (and perhaps should) file a request for payment instead of a proof of claim when seeking administrative expenses. See 4 Collier on Bank- ruptcy ¶ 503.02(1) (“If a creditor is clearly seeking an admin- istrative expense, the request for payment of an Nos. 25-2878 & 25-2879 11

administrative expense should not be labeled as a ‘proof of claim,’ because it is not properly asserted in a proof of claim.”). One final observation warrants emphasis. A Chapter 13 plan must account for attorneys’ fees only once. If it deducts them as a reasonably necessary expense, it should not then allocate projected disposable income to pay for them as well. See 8 Collier on Bankruptcy ¶ 1325.11(4)(c)(i) (counseling against double-counting); see also In re Echeman, 378 B.R. 177, 182 n.7 (Bankr. S.D. Ohio 2007) (“In essence, the effective re- sult is the same for all debtors—priority unsecured claims can be counted once, no more, no less, in determining which funds are left for nonpriority unsecured creditors.”); Dumas, 608 B.R. at 921–22 (similar). But regardless of labels, one thing is clear: Congress in 2005 did not upset decades of past prac- tice or erase the Code’s express command that debtors must pay bankruptcy attorneys’ fees “[b]efore or at the time of each payment to creditors under the plan.” 11 U.S.C. § 1326(b)(1). For these reasons, we AFFIRM.