Paying your taxes with a credit card

I think it is common knowledge that most recent governmental tax liabilities are not dischargeable in a bankruptcy filing.  Theses debts are given a priority status and will survive a debtor’s discharge in a chapter 7.  In a chapter 13, the debtor will be required to pay the priority tax liability inside the plan.

With this information, there are many clients that look to clear this priority debt by using credit cards to pay off the taxes.  The debtors then wait 60 to 90 days to file because they were told they cannot have any recent purchases on their card prior to filing.   Then when the petition is filed, there is no priority debt left and what remains is the dischargeable credit card debt.  Sound pretty smart?  Not so fast.

Code section 523a(14)-(14a) states that debts incurred to pay certain taxes are non-dischargeable as a matter of law.  See 11 U.S.C. § 507(a)(8); In re Redmond, 399 B.R. 628, 633 (Bankr. N.D. Ind. 2008) (Charge made by debtor on bank’s credit card to pay property tax was nondischargeable.)  A debtor cannot convert a nondischargable property tax to dischargeable debt by using a credit card to pay the tax debt.  In re Gavin, 248 B.R. 464 (Bankr. M.D. Fla. 2008).  “Defendant’s argument in response to nondischargeability is that the debt is now an unsecured debt owed to American Express. However, Section 523(a)(14) directly counters this argument. In MBNA America v. Chrusz, funds from a credit card check made to “Cash Deposit” were used to pay nondischargeable taxes. The Chrusz Court found that the funds traceable to payment of nondischargeable Section 523(a)(1) debt were nondischargeable under Section 523(a)(14).” Gavin, 248 B.R. 464, 465 (internal citations omitted); See also Arthur B. Federman, The Bankruptcy Reform Act of 1994, 51 J. Mo. B. 105, 106 (1995) (debtors cannot borrow funds with credit card to pay taxes that would be nondischargeable).”  Also, I have attached a copy of the Redmond and Gavin decisions for your reference.  These are merely instructive, not exhaustive, as there numerous cases on this issue from various jurisdictions.  See also Oneida Ltd. V. Pension Benefit Guaranty Corp.  (In re Oneida Ltd.) 383 B.R. 29, 42 n. 14 (Bankr. S.D.N.Y. 2008).”

To attorneys, because I think this is an often overlooked inquiry on the intake, ask your clients if they used their credit card to pay off any tax liabilities.  Prepare them for the possibility of the creditor objecting to the discharge of the debt as non-dischargeable pursuant to 523.

Of course, the creditor has to raise this objection and probably 7 out of 10 times this charge is overlooked.