Can I discharge a credit card debt that was incurred to pay taxes?
As the tax return season is in full swing, many people have already filed their returns and, unfortunately, may owe the IRS or state taxing agency. While there are usually options available to pay taxes, many people don’t want to deal with an on-going debt. If you already had an eye towards filing for bankruptcy, a question might be can I discharge a credit card debt that I incurred to pay off a tax?
Before getting to the question of whether a debt that was incurred to pay a tax off can be discharged in bankruptcy, it makes sense to look at whether a tax itself can be discharged in bankruptcy. The bankruptcy code (and cases interpreting the code) provides that certain kinds of tax debt cannot be discharged.
The rules surrounding whether a tax debt is dischargeable can be a little confusing. They mostly are time limitations – that a tax return had to have been filed, an assessment made, and time passed. Caselaw has developed to further extend nondischargeability to tax debt arising from a late filed return, or if no return was filed and the taxing authority created a return (such as an SFR).
Notwithstanding, these rules are the limits. That is, if you owe a tax debt that clears these hurdles, then the tax debt IS dischargeable.
Now, getting back to incurring debt to pay off a tax debt. Let’s presume that the tax debt would be nondischargeable (such as the time limits have not yet passed to make the tax debt dischargeable). Can you (and should you) use a credit card to pay that debt off, and then try to discharge that credit card debt in bankruptcy?
The Bankruptcy Code was amended in 2005. Prior to these 2005 amendments, if you used a credit card to pay off a tax debt, the credit card company would most likely sue you in bankruptcy court. The complaint would allege that you committed fraud under the bankruptcy code, and they would be seeking an order declaring your debt nondischargeable.
The 2005 amendment to the Bankruptcy Code added Section 523(a)(14), which states that the discharge would not apply to a debt, “incurred to pay a tax to the United States that would be nondischargeable . . .”
With this 2005 amendment, a creditor no longer has to prove fraud under the bankruptcy code to get an order that the debt owed to it, incurred to pay a tax, is nondischargeable.
Under this amendment, the creditor has to show: (1) the debt was incurred to pay a tax; and (2) the tax owed is or would be nondischargeable.
You should NOT use a credit card (or otherwise incur a debt) to pay off a tax with the intention of discharging that debt in bankruptcy. A creditor can sue you in bankruptcy court for a determination that the debt owed to it is nondischargeable.
Under any circumstance, you first have to determine whether the tax debt is dischargeable in bankruptcy. If the tax debt is not dischargeable, then any debt incurred to pay the tax debt off will be nondischargeable in bankruptcy, thanks to Section 523(a)(14) of the bankruptcy code.
If you have any questions about how bankruptcy may work for you, get in touch with LORK, (718) 738-2324, rkistnen@LORK.nyc, or reach LORK on Facebook (fb.com/kistnenlaw).