Any debt incurred to pay a non dischargeable federal, state or local tax is likewise not dischargeable in a Chapter 7 or 11 bankruptcy case. See, 11 U.S.C. § 523(a)(14). If a debtor obtains a loan to pay off a non-dischargeable tax debt, the loan is not dischargeable in a Chapter 7 or 11 case. Note: These debts are dischargeable in Chapter 13 cases. See the discussion of the Chapter 13 "super" discharge (Chapter 13 – Super Discharge).
Example. Taxpayer files his federal income tax returns for the 2010 and 2013 tax years in a timely manner. He owes $10,000 for each of these tax years. Assume further that Taxpayer filed both the 2010 and 2013 tax returns in a timely manner, but failed to pay the tax. During January 2015, he obtains a $20,000 unsecured loan from ABC Bank for the express purpose of paying the taxes. He uses the loan proceeds to pay off the 2010 and 2013 tax debt. Taxpayer files for Chapter 7 bankruptcy during August, 2015.
The bankruptcy filing will discharge $10,000 of the $20,000 debt owed to ABC Bank because the 2011 income taxes were dischargeable in bankruptcy. The bankruptcy filing will not discharge the remaining $10,000 debt owed to ABC Bank because the 2013 income taxes were not dischargeable in bankruptcy.