If you use your credit card to pay off tax debt that you wouldn't have been able to wipe out in bankruptcy, you won't be able discharge the credit card debt. Here's why.
Are Your Tax Debts Dischargeable?
Certain debts are not dischargeable in bankruptcy; for example, you cannot get rid of child support or payroll taxes. Income taxes are sometimes dischargeable and sometimes not; whether you can discharge income taxes will depend on when they were assessed, when you filed your return and whether the IRS or state government has obtained a lien. (Learn more about when you can and cannot wipe out tax debts in bankruptcy.)
What Happens If You Pay Off Nondischargeable Tax Debt With a Credit Card?
Credit card debt, on the other hand, is generally dischargeable unless the credit card company challenges the discharge because of fraud. Another reason credit card debt can become nondischargeable is if you used your credit card to pay off nondischargeable debt. With regard to income taxes, the bankruptcy law has explicit language stating that you cannot discharge debt incurred in repayment of nondischargeable income taxes.
Example 1. Donna owed the IRS $7,000. The taxes were assessed five years ago; Donna had paid some, but her balance remained high because of interest and penalties. Because the tax debt was so old and because all the circumstances were right, the tax debt was dischargeable in bankruptcy, but Donna did not know this and had no intention of filing. She was worried the IRS would sue her, and she was concerned about the interest and penalties that were accruing, so she used her credit card to pay off the debt. Later, her debts caught up with her and she did file bankruptcy. Because her tax debt was dischargeable at the time she paid it off with her credit card, the credit card debt is also dischargeable, and she will not have to repay it.
Example 2. Kenneth filed his 2011 tax return on April 1, 2012; he owed $900, which the IRS assessed against him. He didn't have the money to pay the debt, so he avoided it. In June 2012, he received a notice from the IRS that the IRS intended to garnish his bank account. In a panic, Kenneth used his credit card to pay off the debt. Six months later, he filed bankruptcy. The income tax debt would not have been dischargeable in bankruptcy, because it was only recently incurred and assessed. His credit card company can file a complaint against Kenneth to make the credit card debt nondischargeable, since he incurred the credit card debt by paying off nondischargeable income taxes. (To learn more about how credit card companies can challenge the dischargeability of a debt, see Complaints for Nondischargeability in Bankruptcy.)
To learn about other situations when a creditor or the trustee can challenge an aspect of your bankruptcy, see our Adversary Proceedings in Bankruptcy topic area.