Understanding Bankruptcy: Aug. 16, 2018

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Question: Can I pay my taxes by credit card, then file bankruptcy?

Credit-card debt is frequently discharged in bankruptcy. Taxes can be paid with a credit card. State and federal governments accept and even encourage such payment.

However, a credit-card debt incurred to pay tax is probably not dischargeable. There are at least two important reasons why credit-card convenience may result in non-dischargeable debt.

In the first place, it could be and often is considered fraud to incur a credit-card debt with the intent to bankrupt the debt. Many courts have ruled that 11 USC §523(a)(2), an exception to the discharge for money obtained by false pretenses or fraud, applies to credit-card purchases made without the intent to repay them. Important information can be found in an article by my colleague, Atlanta bankruptcy attorney Jonathan Ginsberg, called “Recent Credit Card Use and Filing for Bankruptcy – What are some Guidelines?”

Even with the intent to repay a credit-card debt when the charge was made, the debt may be exempt from discharge when it was incurred to pay a tax. Two new laws were added by Congress in 2005 to protect credit-card companies in just this situation. When used to pay a tax that is otherwise non-dischargeable, 11 USC §523(a)(14) and 11 USC 523(a)(14A) protect the creditor from discharge of the debt in bankruptcy.

Under the new laws, use of a credit card to pay tax may turn a tax that is dischargeable with the passage of time, into a debt that never becomes dischargeable. While the bankruptcy code allows discharge of personal income tax after a waiting period, there is no such provision in the new law. This is yet another reason that payment of tax with a credit card may be a bad idea.

Personal income tax that is due for recent years is considered a priority and is not dischargeable under the bankruptcy code. While the tax would become dischargeable in two or three years if not paid, the credit-card debt used to pay it would not.

Next Week’s Question: Is bankruptcy the best way to save your home?

Michael A. Cibik, Esquire

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