In the Chapter 7 bankruptcy case of Rollings, Joseph W. and Janet S.; In re (Chase Manhattan Bank, USA, v. Rollings) the bankruptcy court ruled that credit card debt incurred because debtors used the credit card to pay a IRS bill that they mistakenly believed they owed was not nondischargeable.
The details of the bankruptcy case:
The Chapter 7 debtor and her husband be¬lieved that they owed $2,267 in federal income taxes. They paid this amount using a cash advance from the debtor's credit card. Shortly after they filed for bankruptcy, the IRS informed the couple that they were entitled to a refund of $2,793 because they failed to claim an Earned Income Credit. The credit card company asserted that its claim was nondischargeable pursuant to Section 523(a)(14) because the debtor used a cash advance to pay a tax liability. The court, however, found that the debt was not "incurred to pay a tax ... that would be nondischargeable" as stated in the statute. Consequently, the debtor could discharge the debt.
The court also found that simply because a debtor files a tax return stating that they owe the United States government money does not in and of itself prove that there is actually such a liability. Debtors considering bankruptcy should also note that federal and state income taxes are dischargeable in bankruptcy under certain circumstances and according to how old the tax debt is at the time of filing bankruptcy. If you have old tax debt that you would like to include in a Chapter 7 bankruptcy, speak with a Dallas-Fort Worth bankruptcy attorney today about your options.