23 Nov Don’t Pay Taxes With Credit Cards
The IRS and many state and local tax authorities make it very easy to pay your taxes with a credit card. You should think carefully about doing so, if you may or will be going into bankruptcy in the near future.
First, it’s a good idea not to incur any more debt on credit cards as soon as you realize you may not be able to pay it back. It can be considered fraud to do so and you may not be able to discharge that liability later on. You want to get back to living within your means as rapidly as you can. As they always say, stop digging the hole when you know you can’t get out.
Second, the Bankruptcy Code does not allow you to wipe out debts incurred to pay taxes that would otherwise not be wiped out if you still owed them when you filed, at least in Chapter 7. (You may still wipe this out in Chapter 13.)
In other words, if the tax would not have been wiped out in the Chapter 7 case, then the credit card debt used to pay it wouldn’t be either.
This is important because the credit card lender does not have to object to the bankruptcy discharge in order to avoid being wiped out. So the lender can contact you and pursue normal collection after your Chapter 7 is over, without much warning.
Lenders should remember the caveat that the underlying tax debt would have to be non-dischargeable as well. So the rule does not protect just any loan to pay taxes, but only those which would not be wiped out in the case. If a lender assumes all charges to pay taxes are not discharged in Chapter 7 cases, there’s a good chance that lender will eventually violate the discharge when the taxes paid would have been dischargeable in the case. So the safer course of action for the lender would be to object to discharge in the bankruptcy case to be sure.
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