Now that it’s 2018, Americans are (or at least should be) thinking about paying their 2017 taxes by April. It’s becoming more common to pay taxes electronically, especially by credit card over the Internet where the process is straightforward, doesn’t require envelopes, and doesn’t cost money for postage. For many, these credit-card bills are repaid later and nothing comes of it—hey, why not get frequent-flyer points for paying money you owe anyway?—but what happens to borrowers who can’t so easily repay their credit-card bills? How does New York bankruptcy treat credit-card debt used to pay for taxes?
The best answer is that it’s best to avoid this situation in the first place. Credit cards come with high interest rates, and because tax obligations often add more to credit-card balances than typical purchases, borrowers might not be able to repay them quickly. If you don’t think you will be able to repay your credit-card bill soon after incurring the charge, then you should consider other options. The most obvious option is to ask the IRS for an extension, which it sometimes grants. Alternatively, you can ask the IRS to agree to a repayment plan. The plan will include penalties, but it won’t be as burdensome as interest on a credit card.
As for the next-best answer, if debtors do pay their tax debts with credit cards, then they should be aware that bankruptcy will not automatically discharge those debts. In other words, debtors should not look to discharge credit card debts just because discharging tax debts is more difficult. (I discuss the specific rules for discharging tax debts in a post about how bankruptcy courts are less forgiving of late tax returns, which is another problem for debtors.) In fact, the credit-card debt will only be dischargeable to the extent the tax debt is dischargeable. The Bankruptcy Code’s goal is to discourage strategic bankruptcy filings based on these reasons.
That leaves chapter 13.
In chapter 13, tax debts are priority debts that must be repaid in full according to the debtor’s repayment plan. Debtors who fall on hard times might be able to obtain a hardship discharge on their chapter 13 repayment plans. It’s also possible that debtors might be able to convert their cases to chapter 7 after the tax debts become dischargeable.
Debts incurred to pay taxes, though, are dischargeable in chapter 13. They are treated as any other unsecured, nonpriority debt. However, in chapter 13 New York bankruptcy, debtors must propose a repayment plan that promises some payment to unsecured, nonpriority creditors. Ultimately, that means that in either chapter most debtors can expect to pay back some of the money they borrowed to pay their taxes.
Tax debts, and debts incurred to pay taxes, can complicate a person’s finances, to say nothing of a bankruptcy. If you have significant tax debts, then consulting with an experienced bankruptcy lawyer can help you strategize your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
