Certain income tax debt is not dischargeable (not eliminated by bankruptcy). Also, in general, unsecured debt such as credit card debt and personal loans, is dischargeable in bankruptcy. However, the 2005 bankruptcy code amendment no longer permits a discharge of an unsecured debt that was used to pay taxes that would not have been discharged at the time of the bankruptcy filing.
A credit card or a personal loan that is used to pay for tax debt, that would not have been discharged, is also not discharged. In this situation, a person cannot eliminate the credit card debt that was used to pay for taxes, that is not dischargeable. This means that the credit card debt is not eliminated in the bankruptcy case and the debtor continues to be liable for such debt.
The creditor may have difficulty determining which funds were used to pay for taxes, if the payment was not made directly to the taxing authority. Also, based on the drafting of this matter of the bankruptcy code, it can be argued that this limitation does not apply to a chapter 13. In other words, it can be argued that this limitation only applies to a chapter 7 debtor and not a chapter 13 debtor, who would be able to eliminate such a debt.
NJ bankruptcy attorney Robert Manchel can be contacted at (866) 503-5655.