Bankruptcy – Creditor can’t examine debtor under Bankruptcy Code § 707(b)(1)

Where the majority of the debtor’s debts were not primarily consumer debts, a creditor could not examine him under Bankruptcy Code § 707(b)(1). That section applies only to debtors whose debts are primarily consumer debts.

Background

Richard Piland Jr. filed a Chapter 7 bankruptcy petition that listed Westlake Legal Group PLLC as a creditor. Westlake filed a motion to conduct examinations of the debtor and his wife pursuant to Rules 2004 and 9016 of the Federal Rules of Bankruptcy Procedure.

At the hearing on Westlake’s motion, Westlake said that the purpose of the Rule 2004 examination was to determine whether the granting of a discharge is presumptively abusive under Bankruptcy Code § 707(b)(1). Because section 707(b) applies only to debtors whose debts are primarily consumer debts, the court must determine whether Mr. Piland’s debts are primarily consumer debts.

Analysis

“[T]he majority of courts that have considered the issue have concluded that a debt for unpaid income taxes is not in the nature of a ‘consumer debt’ under § 101(8).” Based on the exhibits filed with the court, the debtor’s total tax debt as of the petition date was not less than $159,242.82, which exceeds the debtor’s undisputed consumer debt of $140,674.30.

Westlake relies on the code 530 transaction entries (“Balance due account currently not collectible – not due to hardship”) displayed under the transaction history in the IRS transcripts for tax years 2013 and 2014 to argue that the liabilities for those years are either uncollectible or zero and therefore should not be included in the calculation for purposes of § 707(b). The court is not persuaded by Westlake’s argument.

The figure zero in the entry does not establish that the liability is zero. Instead, it is a notation used in the transaction history when an entry reflects an account status rather than a dollar-value transaction; it does not represent the balance of the account. The transcripts themselves confirm this: interest and penalties continued to accrue after the code 530 entries, as reflected by subsequent code 196 entries. Interest cannot accrue on a balance of zero.

Not only that, but the transcripts disclose that the account balance plus accruals is $36,861.81 for the tax period ending 12-31-2013, and the account balance plus accruals is $18,163.08 for the tax period ending 12-31-2014. The header section of each transcript states unambiguously “Account balance plus accruals (this is not a payoff amount).”

Nor does the code 530 designation render the underlying liability uncollectible in any legally meaningful sense. An administrative determination that an account is not collectible does not extinguish or reduce the underlying tax obligation. In any event, both accounts include subsequent code 537 entries reflecting that the IRS itself designated each account as “currently considered collectible” prior to the petition date.

Notwithstanding the IRS’s administrative notation used on the transcripts, the underlying tax liability remains a valid legal obligation of the taxpayer and constitutes a debt. In this case, the debtor’s tax liability for years 2013 and 2014 constitutes a valid obligation regardless of whether the IRS suspended active collection efforts and designated the account as “currently not collectible” under an administrative code 530 designation. An IRS determination that an account is not collectible is an exercise of administrative discretion and does not eliminate the underlying assessed obligation.

Accordingly, because the 2013 and 2014 IRS tax liabilities are properly counted in calculating the debtor’s non-consumer debts, the court concludes that Mr. Piland’s debts are not primarily consumer debts. Because his debts are not primarily consumer debts, § 707(b) does not apply to this case. Westlake’s sole basis for seeking an examination under Rule 2004—to determine whether the presumption of abuse arises under the means test—is mooted by the court’s determination that § 707(b) is inapplicable to this case.

So ordered.

In re: Richard Piland Jr., Case No. 25-50725, April 30, 2026 WDVA Bankr. at Richmond (Connelly). VLW No. 024-4-035. 6 pp.

Full-Text Opinion
VLW No. 024-4-035