New Jersey Attorney Explains What Happens To Credit Card Debt That Is Used To Pay Income Taxes In A New Jersey Bankruptcy Case.
Typically, in a New Jersey chapter 7 bankruptcy case, unsecured debt is discharged (eliminated). If a debtor meets all of the chapter 7 criteria, the unecured debt will be discharged and the creditor will never again, be able to attempt to collect the debt. In general unsecured debt is any debt that is owed to a creditor, that is not secured or connected to property, such as a car or house. Also, unsecured debt is different than certain types of debt that is not dischargeable, such as child support arrears and/or some types of tax debt. The most common types of unsecured debt is credit card debt and personal loans, that are not secured against property.
The bankrutpcy law provides an exception to the discharge of credit card debt, in a chapter 7, in the event that a credit card is used to pay a specific income tax liability, that would not have otherwise been discharged. In other words, if the the income taxes that were paid, would not have been discharged, the credit card debt that was used to pay the taxes are not discharged, as well. Therefore, to determine if such credit card debt is not discharged, we must review how taxes are discharged. There are other blogs, within my website, that provide a detailed explanation as to the criteria that required for discharging tax debt in New Jersey.
There are specific types of tax debt that are never dischargeable, such as sale’s taxes and taxes due from employers that are collected from their employees and not paid to the taxing authority. Income tax debt, in certain circumstances, may be discharged. The criteria for discharging income tax debt is partly based on the tax year in which the debtor is attempting to discharge. A bankruptcy filing may permit the discharge of income tax debt for some years and not others. The determination as to whether a person may discharge income tax debt, is based on whether the debtor meets the criteria of each year. Therefore, a complete discharge analysis must be completed for each year.
The following are the criteria that is required to discharge income tax debt for a specific tax year, in a New Jersey chapter 7 bankruptcy case: (1) The date on which the bankruptcy case is filed must be three years after the date on which the tax return was due (ie. typically April 15th of the following year); the returns of said year was actually filed more than two years prior to the bankruptcy filing date; the tax authority assessed the income taxes, for such year, more than 240 days prior to the bankrupty filing date; no tax lien was filed for such tax year. Please note that the above referenced dates will be tolled and extended for periods that the taxing authority is not permitted to collect a debt from the creditor. For example, the dates are extended for periods in which the debtor is under an agreement to make payments on taxes for a specific year.
The bankruptcy code does not permit a discharge of the portion of the credit card debt that was used to pay income taxes, for a particular year, that would not have been discharged based on the criteria explained in the paragraph above. However, all of the other credit card debt that is due to the same creditor, that was not used to pay the taxes, will be discharged. Typically, the credit card company would be required to prove such circumstances by filing an Adversary Complaint with the court, objecting to the discharge. Also, the credit card company would likely be required to prove that the funds were used to pay certain taxes that would have not been discharged.
Additionally, based on the bankruptcy code, this chapter 7 discharge exception does not apply to a New Jersey chapter 13 case. In other words, if a non-dischareable tax debt is paid with a credit card, the credit card debt would be discharged in a chapter 13. Please note that this blog explains this complex and detailed subject matter in a very consice and general manner. The results will differ under various situations and facts.
Contact Manchel New Jersey Law, at 866 503 5644, to discuss your NJ. bankruptcy law questions.