Please keep me anonymous because I think what I’m going to propose to you may not be above the law. Here is my situation and plan. I am going to owe about $15,000 in income tax for the 2011 tax year. I have a Bank of America Visa with a $20,000 limit and only owe about $3,000 on it. I owe in total about $10,000 on my other cards.
Frankly, I’m behind the eight ball and am planning on filing for bankruptcy soon. I want to get rid of my tax debt to start fresh, so am thinking of charging it to my Visa card before I file. This way, the IRS gets their money and I’m off the hook, right? Is there a catch? — Anonymous
Yeah, I’d keep that little plan of yours to yourself. In fact, I strongly suggest you tuck it away into the far recesses of your mind so it doesn’t creep its way to your consciousness again.
While Chapter 7 bankruptcy can be a great way for people to escape the burden of overwhelming debt, it comes with many restrictions. First, not everyone is allowed to file. You have to meet specific criteria and go through special counseling.
If you are permitted to use the process, you can discharge your current credit card balances, as well as other debts you might have, such as medical bills, collection accounts and personal loans. It’s even possible to walk away from some money owed to the IRS. The general rule is that it’s got to be over three years old from the time it was assessed or from when you filed the return.
However, the list of financial obligations that are non-dischargeable in bankruptcy is a tad longer. It includes most student loans, child and spousal support arrearage, legal fines and fees, debt related to fraud (like, uh, running up the cards knowing you were going to file) and recent tax debt.
So why can’t you just charge the amount you owe to the IRS and then take care of it in bankruptcy court? Because not only would it be considered fraud (see above) but balances incurred for tax debt is also non-dischargeable. It’s illegal. You see, way back in 2005, Congress added a federal law to protect credit card companies against this kind of abuse. Don’t mess with federal law or the IRS. It’s not worth the trouble.
Now, all this doesn’t mean that you can’t or shouldn’t pursue bankruptcy. If filing is appropriate, it could help ease the pressure. By discharging allowable debts, you may have enough income left over after paying your basic expenses to pay the government.
Even if bankruptcy is not going to work, you still have options. The IRS offers installment programs to people who can’t pay the entire sum in one fell swoop. You’ve got to be current on your taxes now, and fees and interest will apply, but you can spread the debt out for up to 60 months.
It really looks like you need to get your entire financial situation under control, though. You’re long overdue for a serious sit down with a credit counselor. The counselor will review your assets, income, budget and all of your liabilities — tax debt included. At that point, he or she will be able to guide you toward the best resolution, which can be anything from a debt management plan to the legal route that you’ve been considering.
But whatever you do, don’t try to finagle your way around the system or your moral duty. If at all possible, repay what you borrow. Make good on your taxes. We all have to pay ‘em. Then you can hold your head high and say your name proudly.