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.