January 20, 2020

Can I Pay my Taxes with a Credit Card, then File Bankruptcy to Discharge the Debt?

no discharge of tax debt paid with credit cardWith April 15 just around the corner, many of us will be scrambling to come up with money to pay Uncle Sam.  For those who are self employed, estimated tax liability payments are due every quarter.  The IRS does allow you to pay your tax debt with a credit card, but you can expect to pay a “convenience fee” of around 2% of the amount charged. for this option.

Further, if you do use your credit cards to pay your tax debt, the Bankruptcy Code specifically disallows that part of your credit card debt to be discharged in a bankruptcy case, unless the tax you are paying is dischargeable as well.

The Bankruptcy Code is silent as to how long the non-dischargeability status remains associated with credit card debt when you continue to use and make payments on that credit card for several months prior to filing for bankruptcy, and that makes for some interesting conjecture.

Consider, for example, a situation where you use your credit card on April 14 to charge 2011 tax debt of $10,000.  The bill for April arrives on May 5 and you make minimum payments and partial payments totaling $7,500 for the next few months.  You also continue to use the card for buying food, gasoline and other necessities.  In November, you file Chapter 7 with the balance on your credit card at $12,000.  How much, if any, of that $12,000 balance is non-dischargeable per Bankruptcy Code Section 523(a)(14) or (14a)?

What happens if some of your tax debt is dischargeable and some is not – how would a bankruptcy judge rule on a dischargeability complaint?  Would you exit bankruptcy still owing $10,000, $5,000, nothing?

Some of these questions have answers and others do not, however the time to consider these issues is as far in advance of a possible bankruptcy filing as possible.  If you are considering using a credit card to pay tax debt, it would not be far fatched to conclude that filing bankruptcy may be a possible future course of action.  It would therefore be wise to schedule a meeting with a bankruptcy lawyer to consider a variety of “what if” scenarios.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

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