Don’t Pay Your Taxes With Your Credit Card!

“I owe a lot of taxes. Should I pay that tax bill with my credit card?”

If you’re considering bankruptcy at some point down the road, the answer is definitely no, don’t do that.

There’s a specific exception to the Chapter 7 discharge that says you cannot discharge credit card debts that were incurred to pay non-dischargeable tax debts. It’s like you’re swapping out one kind of tax debt for another. The bankruptcy code considers that to be unfair.

An interesting twist on this is that if you file a Chapter 13 case, you can discharge those credit card debts as long as you pay over all of your net disposable income over the 60-month term of the Chapter 13 plan.

One of the reasons why you don’t want to use your credit cards to pay your tax debt is because delinquent taxes may have a 6 or 7 percent interest rate and there might be penalties that you have to pay, but if you can’t pay your credit card bills timely you’re going to be paying 18 percent, 25 percent as high as 29 percent on your credit bills and you’re not going to be able to discharge them in Chapter 7. So it’s just not a good financial move for you to make.