11 U.S.C. Section 1194 - Payments

What Is Section 1194?

Section 1194 governs payments under a Subchapter V plan and during the pre-confirmation period. The provision has two main components: pre-confirmation payments to the trustee under Section 1194(a), and post-confirmation payment mechanics under Section 1194(b).

The default rule in nonconsensual cases is that the Subchapter V trustee acts as disbursing agent, collecting plan payments from the debtor and distributing them to creditors in accordance with the confirmed plan. In consensual cases, the debtor typically continues to make payments directly to creditors.

Pre-Confirmation Payments: Section 1194(a)

Section 1194(a) provides that "[p]ayments made under a plan to a holder of a claim or interest shall be made to the holder of that claim or interest by the trustee" except as the plan or confirmation order provides otherwise. Before confirmation, the trustee holds any payments received from the debtor and disburses them only as authorized by court order or by the confirmed plan.

Pre-petition retainers paid to debtor's counsel, sale proceeds, and other estate funds received before confirmation are typically held in escrow or in a debtor-in-possession account, with disbursements requiring court approval under Section 363(b) or Section 330 (for professional fees).

Post-Confirmation Payments in Nonconsensual Cases

In a nonconsensual case confirmed under Section 1191(b), the trustee makes payments under the plan pursuant to Section 1183(b)(6). The debtor remits plan payments to the trustee on the schedule set by the plan, and the trustee disburses to creditors. This structure provides creditors with an independent disbursing agent and helps ensure compliance with the plan's terms over the 3-to-5-year period.

The trustee's fees for the disbursement function are paid as administrative expenses under Section 503(b)(2) and Section 330. The plan must account for these ongoing administrative costs in its feasibility analysis under Section 1129(a)(11).

Post-Confirmation Payments in Consensual Cases

In a consensual case confirmed under Section 1191(a), the trustee's service generally terminates upon substantial consummation of the plan under Section 1183(c)(2). After that point, the debtor makes plan payments directly to creditors without trustee intervention. The plan may, however, provide for continued trustee involvement, and parties may agree to a different structure where useful.

This bifurcated structure (trustee disburses in 1191(b) cases, debtor disburses in 1191(a) cases) reinforces the incentive for debtors to seek consensual confirmation: it eliminates the trustee fee overhead and gives the debtor direct relationships with its creditors going forward.

Treatment of Returned or Undeliverable Payments

When a payment to a creditor is returned or cannot be delivered (because the creditor has moved, the entity has dissolved, or other reasons), the trustee or debtor holds the funds and must take reasonable steps to locate the creditor. Federal Rule of Bankruptcy Procedure 3011 governs the disposition of unclaimed funds, ultimately requiring deposit with the registry of the court under 28 U.S.C. Section 2042 if the creditor cannot be located.

Returned funds do not automatically revert to the debtor or to other creditors; the unclaimed-funds procedure preserves the creditor's right to recover the payment indefinitely.

Related Bankruptcy Code Sections

This section operates in concert with several other provisions of the Bankruptcy Code:

• Section 1183 - Trustee disbursement duties
• Section 1191 - Plan confirmation standards
• Section 1192 - Discharge after completion of payments
• Section 1195 - Transfers in Subchapter V
• Section 503 - Administrative expenses including trustee fees

Understanding how these sections interact is important for debtors, creditors, trustees, and counsel navigating a bankruptcy case.