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If I Paid Taxes with a Credit Card, is the Debt Dischargeable in Bankruptcy?

  • Monday, March 24, 2014

    If I Paid Taxes with a Credit Card, is the Debt Dischargeable in Bankruptcy?

    Governmental tax agencies often promote the use of credit cards for payment of tax debt. Recent tax debt is typically not dischargeable in bankruptcy, while unsecured credit card debt typically is. So why not just pay off recent tax debt with a credit card before filing for bankruptcy? This would turn the tax debt into credit card debt that would then be eliminated by the bankruptcy.

    It Might be Considered Fraud.

    If you incur a debt with the intent to then declare bankruptcy on the debt, you are committing a fraud. Under 11 USC §523(a)(2), there is an exception to the discharge of debt in bankruptcy for money obtained by fraud or false pretenses. This would include making a purchase with a credit card while never intending to repay the debt. If you choose to pay a tax debt with a credit card, knowing all the while that it will be discharged in bankruptcy, you are committing a fraud. If the court decides you have committed this fraud, you will still be on the hook for the debt after bankruptcy.

    What If I Never Intended to Declare Bankruptcy when I Paid with my Credit Card?

    When the bankruptcy laws were changed in 2005, some new provisions were made to protect credit card companies. Under both 11 USC §523(a)(14) and 11 USC 523(a)(14A), when a credit card is used to pay off tax debt, the otherwise dischargeable credit card debt becomes non-dischargeable. In essence, though non-dischargeable tax debt has been transformed into unsecured credit card debt prior to filing bankruptcy, the debt will survive the bankruptcy regardless of how it was characterized prior to filing.

    I Could End Up Paying Tax Debt that the Bankruptcy Would Have Eliminated.

    By putting older personal income tax debt on your credit card, you have transformed debt that would have been eliminated in bankruptcy into debt that will survive the bankruptcy. How is this possible?
    Recent income tax debt is considered priority debt, rendering it non-dischargeable in bankruptcy. However, when the tax debt is old enough, it typically becomes fully dischargeable in bankruptcy. But if you put that tax debt on your credit card, it again becomes non-dischargeable as a fraud and under the 11 USC §523(a)(14) and 11 USC 523(a)(14A) rules. You have also eliminated any possibility of strategically filing the bankruptcy after enough time has elapsed to eliminate older personal income tax debt.





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