Bank finance articles and tips

The IRS not only allows debtors to pay their tax debts with credit cards; they encourage it. However, it may not be the wisest decision. Let's take a look at a few reasons why:

Once A Tax Debt Always A Tax Debt

While some debtors may want to charge tax debt to their credit card to get the IRS off their back, doing so will not change the nature of the debt. If a debtor decides to file bankruptcy and the credit charges have not been paid, the bankruptcy court will treat that portion of the credit card debt as tax debt. If the tax debt would not have been dischargeable in bankruptcy, they debtor will not be allowed to discharge that portion of their card. For example, if the bankruptcy debtor put $1,000 in 2010 taxes on their card and then filed bankruptcy, the bankruptcy court might not discharge the debt because the taxes are recent and would not normally receive a discharge in bankruptcy.

Intention Influences Right To Discharge

In 2005, changes in the bankruptcy code were implemented to protect credit card company interests. One of these changes involved charges which were made with no intention of repayment. If the bankruptcy court believes that the debtor charged taxes to a credit card and had no intention of paying the debt, they will deny the bankruptcy discharge. How do they determine intention? The most important factor in determining intention to pay is the behavior of the debtor. If the debtor charged taxes to their card and never made a payment, the bankruptcy court could safely assume that the debtor never had an intention to pay the debt.

High Interest Charges

While the IRS is notorious for high "failure to pay" penalties, the interest rates on taxes is relatively low compared to credit card interest rates. However, the debtor can increase the costs of tax debt by charging it to a card which has high interest rates. If a bankruptcy court determines that a debtor is obliged to pay the taxes on their credit card, the bankruptcy debtor will be required to pay both the principal and the high interest rates. That's why paying tax debt with a credit card is unwise unless the debtor intends to pay off the card before interest is charged.

If you're considering bankruptcy and you have already charged taxes to your card speak with a bankruptcy attorney about your options. You may have the opportunity to pay off the card debt before filing bankruptcy, or the attorney may suggest another effective strategy for reducing any issues which may arise from charging tax debt to a credit card.

Reed Allmand, sponsoring attorney for Bankruptcy.net, is constantly looking for ways to provide the best financial information for his clients. Whether you are considering filing for bankruptcy, or are currently going through a Chapter 7 or Chapter 13, visit http://www.bankruptcy.net for up to date news and information you need to know.

By Reed Allmand
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