Payment of Tax Liabilities with Credit Cards

We are often asked whether a client should pay outstanding tax liability with a credit card. After all, credit card debt is commonly discharged in a Chapter 7 Bankruptcy; on the other hand, tax liabilities are often not dischargeable except under limited circumstances (the discharge of tax liabilities are discussed in a separate blog).

Image Source (CC BY 2.0) by armydre2008 via flickr
Image Source (CC BY 2.0) by armydre2008 via flickr

There are several risk factors that bear on this question. The court may determine that the credit card payment to the IRS is non-dischargeable due to fraud, i.e., it was simply an attempt to convert a non-dischargeable tax liability to a dischargeable credit card debt. The bankruptcy filing itself suggests that the debtor had no intention to repay the credit card obligation; if the debtor was unable to pay regular living expenses such as a mortgage, utilities, etc., it may be assumed that the debtor had no ability or intention to repay the credit card obligation.

Moreover, 11 USC §523(a)(14) and 11 USC 523(a)(14A) provide that if you do use your credit cards to pay a non-dischargeable tax debt, the credit card obligation is also not dischargeable.

Whether a credit card payment of a tax becomes dischargeable with the passage of time is an open question. It is possible that a Bankruptcy Court will decide that if a substantial period of time passes between the credit card payment and the bankruptcy filing that the credit card obligation is dischargeable. This is more probable if payments were made on the credit card in the interim.

For further information, contact the experienced bankruptcy attorneys at Hoffman, Larin & Agnetti PA.


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