by Court Rejects City of Chicago’s Bid to Subordinate Attorney’s Fees to General Unsecured Claims
In a published opinion, the Seventh Circuit affirmed the confirmation of two below-median Chapter 13 plans that provided for payment of debtor’s attorney fees ahead of distributions to nonpriority unsecured creditors. In In re Falkner, Nos. 25-2878 & 25-2879 (7th Cir. June 10, 2026), the court rejected the City of Chicago’s sweeping argument that 11 U.S.C. § 1325(b)(1)(B) bars payment of attorneys’ fees during the commitment period until unsecured creditors first receive all of a debtor’s projected disposable income. Writing for a unanimous panel, Judge Scudder held that the Bankruptcy Code as a whole—and decades of settled practice—foreclose the City’s reading. NCBRC and NACBA, joined by two standing Chapter 13 trustees, had filed an amicus brief urging affirmance.
Background
Ahmed Alayah and Stephen Falkner each filed for Chapter 13 in June 2025 and, as below-median debtors, proposed three-year plans paying secured creditors, priority claims, the trustee’s fee, and their bankruptcy attorneys’ fees. Alayah’s plan directed his remaining $800 of net monthly income to nonpriority unsecured creditors—including the City of Chicago, to whom he owed $12,511.66—on a pro rata basis. Falkner’s plan left no net income for nonpriority unsecured creditors. The City, a nonpriority unsecured creditor in both cases, objected, contending that paying counsel first violated § 1325(b)(1)(B). The bankruptcy court (Cassling, J.) overruled the objections and confirmed both plans, and the City appealed.
The City’s Theory
The City argued that following an objection, § 1325(b)(1)(B) requires that “all of the debtor’s projected disposable income” be applied to “payments to unsecured creditors,” and that Chapter 13 counsel are not “unsecured creditors” who may share in that income. Alternatively, the City contended that even if counsel were unsecured creditors, the attorneys here were out of luck because they had never filed a proof of claim. The City framed the 2005 BAPCPA amendment—which added the words “to unsecured creditors” to the statute—as a “sea change” prohibiting payment of attorneys’ fees ahead of nonpriority unsecured creditors during the commitment period.
The Seventh Circuit’s Analysis
The court refused to read § 1325(b)(1)(B) in isolation. Reading the Code as a whole, it explained that §§ 1322(a)(2) and 1326(b)(1) not only permit but require Chapter 13 plans to pay priority claims—including court-approved attorneys’ fees under §§ 507(a)(2), 503(b)(2), and 330(a)(4)(B)—”[b]efore or at the time of each payment to creditors under the plan.” Interpreting § 1325(b) to preclude payment of administrative expenses would place it in direct conflict with § 1326(b).
Invoking Hamilton v. Lanning, 560 U.S. 505 (2010), the court declined to read the Code “to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.”
The court offered two independent grounds for affirmance even reading the statute in isolation. First, attorneys’ fees may qualify as a “reasonably necessary expense,” meaning the funds would not be drawn from projected disposable income at all. Second, and regardless, bankruptcy attorneys who accrue an unsecured right to payment before the petition date qualify as “unsecured creditors” under the Code’s broad definitions in §§ 101(5) and 101(10), and so may receive projected disposable income. Citing Johnson v. Home State Bank, 501 U.S. 78 (1991), the court emphasized that “unsecured creditors” in § 1325(b)(1)(B) means unsecured creditors generally—not just nonpriority ones.
Finally, the court rejected the City’s proof-of-claim argument, holding that administrative expenses follow the separate procedure of § 503(a), under which an entity “may timely file a request for payment of an administrative expense.” No hard-and-fast rule requires counsel to file a proof of claim to be paid.
The court closed with a cautionary note against double-counting: a plan must account for attorneys’ fees only once, either as a reasonably necessary expense or through projected disposable income, but not both.
Why This Matters
As NCBRC’s amicus brief warned, the City’s position would have subordinated administrative expenses to general unsecured claims—something Congress has never done—and made it economically impossible for many below-median debtors to retain counsel without paying fees up front. The court’s decision preserves the long-settled structure under which debtors’ counsel are paid through the plan in the ordinary course.
NCBRC’s amicus brief, joined by NACBA and Chapter 13 Trustees Tracy L. Updike and Thomas H. Hooper, was drafted by NCBRC Board Member Thomas Moers Mayer of Herbert Smith Freehills Kramer (US) LLP.
The Debtors were represented by Michael Miller of The Semrad Law Firm, LLC in Chicago, Illinois.
Opinion and Briefs
In re Falkner (City of Chicago) – Seventh Circuit Opinion
Amicus Brief of NCBRC, NACBA, Trustee Updike & Trustee Hooper
Appellant City of Chicago’s Brief
Appellees/Debtors’ Brief