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Getting Banks To Pay Your Taxes: Some Debtors Are Discharging Credit Card Debt Used For Income Taxes
I have met three or four prospective Chapter 7 bankruptcy clients over the past few months who told me they paid their 2007 taxes with a credit card and that they now want to file bankruptcy to include the same credit card debt. The effect is that the credit card lender will have paid the clients’ income taxes, and that the clients would have discharged their income tax bill. Income taxes are not dischargeable in bankruptcy.
I am not aware of any bankruptcy court decisions addressing this type of debtor strategy. The credit card company could challenge a significant credit card charge for taxes, or any other reason, close to filing bankruptcy. The debtor would have little or no defense. If the credit card company does not challenge the tax charge then the debtor could "get away with it." It could be that the amount of taxes paid by credit card is below the amounts that the lender finds economical to pursue in a bankruptcy adversary proceeding. If this practice comes to light, some bankruptcy trustees may start asking debtors during tax season if they have used a credit card to pay taxes at least to get the information on the record.
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida
April 4, 2008 in Tax in Bankruptcy | Permalink
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Comments
The above post is correct. You cannot discharge a debt that was incurred to pay an otherwise non-dischargeable debt. Of course, perhaps the credit card company doesn't catch it?
Posted by: Larry Heinkel | Jun 30, 2008 9:19:25 PM
How far back do credit cards look if you have already paid property taxes with them?
Posted by: rob | May 9, 2008 12:11:07 PM
We had this happen in our office. The client had recently used the credit card to pay taxes, and the card caught it. The attorney involved might have been the most reasonable creditor counsel I have ever encountered – he even went to far as to complain about tactics some trustees use that he deemed unfair to debtors, and complained about creditors wanting to repossess financed cars that were current, but not reaffirmed. He was more than happy accepted small payments at 0% interest to repay the charge of the taxes, and agreed to discount if paid early, they also were happy to stipulate to it without a full adversary case. The attorney even made a comment that our client probably did the right thing in using the card as the IRS would have likely charged much more interest and penalties than they card was now, and so the client made the right choice. His attitude was basically as long as the client is somewhat willing to work with them, he really did not care if the card was had been used and really did not blame the client.
Sure maybe some clients get away with it, but ours got caught. Be even though they did get caught, they actually came out ahead and certainly did not get burned. With some luck other attorneys will take this one’s lead and be reasonable.
Posted by: Jess | Apr 8, 2008 2:09:50 PM
Wouldn't the amount of credit card debt used to pay income taxes fall with the scope of 523(a)(14) which state that "A discharge . . . .does not discharge an individual debtor from any debt . . . incurred to pay a tax to the United States that would be non-dischargeable pursuant to paragraph (1)" and therefore be excepted from discharge?
Posted by: J. Saint | Apr 4, 2008 6:11:36 PM
