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Paying Debts With a Credit Card Before Bankruptcy Can Backfire

There are many debts that are not covered by a discharge order in New York bankruptcy, so it might be tempting to try to transfer one to a credit card and then file bankruptcy to get rid of it. This is a bad idea and it probably won’t work, especially for tax debts. Moreover, it doesn’t help that the state’s Department of Taxation and Finance allows debtors to pay their taxes with a credit card, creating the temptation.

For tax debts in particular, the Bankruptcy Abuse Prevention and Consumer Protection Act, which is now a decade old, added some language to the Bankruptcy Code that prevents the discharge of debts incurred to pay otherwise nondischargeable taxes, specifically 11 U.S.C. § 523(a)(14) and § 523(a)(14A). The first section applies to federal taxes, and the second applies to non-federal taxes.

In fact, trying to shift a tax debt to a credit card risks turning a dischargeable debt into a nondischargeable one. Taxes older than three years (and subject to other rules discussed here) can be discharged. The credit card debt created to pay them might not be for the reasons discussed above. As a result, so long as the tax otherwise fits the Bankruptcy Code’s requirements (or will in the future), then debtors are much wiser at the very least to wait until they can discharge the tax debt.

There are other reasons not to pay debts with a credit card, irrespective of whether they’re owed to the government. Primarily, there’s the rule against allowing the discharge of debts incurred by false pretenses, false representations, and actual fraud, which is found in Section 523(a)(2) of the Bankruptcy Code. Creditors or the trustee will probably not have too much difficulty showing that the debt was incurred with little intent to pay it back, particularly if it’s for an otherwise nondischargeable debt.

Also, depending on the type of debt that’s being extinguished in place of the credit card debt, the penalties can be much higher. If the bankruptcy doesn’t go through, not only will the debtor be stuck with the credit card debt, but he or she will also face high interest rates. In the case of a tax debt, IRS fees and penalties are usually far lighter.

It’s not impossible to prove that the transfer of a nondischargeable debt to a credit card was done with the intent of repayment. The context matters. For example, debtors sometimes try to consolidate debts onto one credit card with a low interest rate as a debt management strategy. If it backfires and leads to a bankruptcy filing, so debtors might be able to show that the transfer was made in good faith.

Credit card debts are the most common kind to be discharged in bankruptcy, but creditors will not sit by and allow debtors to take advantage of their services, especially for nondischargeable debts. That’s why talking to an experienced New York bankruptcy lawyer when trouble arises is always better than engaging in shenanigans aimed at outwitting creditors.

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 fair debt collection practices acts Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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