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Can a Ch. 7 BK Trustee take money or other non exempt assets to pay mortgage debt if I retain the property?

San Diego, CA |

I am considering filing Chapter 7 BK but I spoke with an attorney and he said I have more money/assets than are allowable for exemption. I am trying to short sell my home but I refinanced in 2006 and my CPA said the unpaid mortgage balance will result in tax liabilities. After researching online I found that if I file BK before I short sell then I won't be taxed. My question is if I file BK can the Trustee take my money/assets that are not exempt to payoff my mortgage creditor?

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Attorney answers 7


Your question is best answered by a CA attorney, so end up there for specific direction. Generally, Chapter 7 Trustees are ONLY interested in unsecured debt. If you have unsecured debt and non-exempt assets, then you would be exposed to the trustee's power. Usually, secured lenders recover their money only from the recovery and liquidation of collateral. IF YOU DO A SHORT SALE, your attorney would likely demand a "non-recourse" term, which means that the lender would be satisfied in full. However, your local Bankruptcy court custom might require court approval. Since you've already consulted with an attorney, I recommend you raise these issues on a second consultation. Good luck.

Of course, you should never take my answer, (or any advice you get online) as legal advice. You should talk directly to a lawyer licensed to practice in your state. My firm is able to assist you in all your debt, bankruptcy, and business related needs in Maryland. To speak to me or another associate in our firm, please call Russack Associates at 410-505-4150.


If you file Ch. 7 and have non-exempt money/assets, the Trustee can take any/all of those non-exempt assets and use to pay creditors. If the non-exempt money you are referring to is non-exempt excess equity in your home, but you are not planning to keep the home (which I assume since you said you would short-sell it) then it should make no difference to you if the Trustee chooses to take the property to sell in order to realize any net equity if that equity would not be exempt anyway. You are correct that if the underlying debt (the mortgage) is discharged in a BK, then even if you receive a 1099C from the lender, you will more than likely not have any tax liability if you complete and file IRS Form 1098 showing that the debt was discharged in bankruptcy. However, your question and your intentions are a little confusing. If you actually have enough non-exempt equity to pay off the mortgage, then perhaps you should consult with a bankrupcy attorney to discuss a possible Chapter 13 and keep the house and the equity and may some of the debt over a 3-5 year plan. It would be wise to arrange for another consultation with a local bankruptcy attorney to discuss your entire financial situation, the availability of exemptions and other options, to see if a bankruptcy is the right course of action for you and what the pro's and con's would be.

William James Waters

William James Waters


Correction - I meant to say IRS Form 982.


"After researching online I found that if I file BK before I short sell then I won't be taxed." -- If your debt is discharged in BK, whether you short sell or not, and if you file the appropriate form with the IRS if you are issued a 1099 for COD income, that income will not be counted.

I urge you to stop trying to figure out the answers to your questions yourself because, just as you misunderstood the information available to you on the net, you will not have a grasp on the issues which are important for you to consider with respect to a potential bankruptcy.

You really do need to consult an attorney who as fully reviewed your entire financial situation, and other facts, for advice. You have many options. The best one for you can only be discovered with the assistance of a bankruptcy attorney.

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Just because you have more assets than are covered by exemption does not mean you can't file for bankruptcy; it just means you may turn over some non-exempt assets. However, if you file and you have non-exempt assets, the trustee distributes them to creditors who file allowable claims. It would be the trustee's job to determine whether the mortgage deficiency is an allowable claim. The tax consequence is a separate issue. If you are going to file bankruptcy anyway, then don't short sell before filing and surrender the property. If, after filing you still wish to short sell, this would eliminate any tax consequence.


No ... but he/she can take them to pay off your other debts.
How much does your money/assets exceed the vehicle & wildcard exemptions of approximately 27,000?


I think you need to get a second opinion from another bankruptcy attorney. Pre-bankruptcy asset protection planning is one of the most important things a bankruptcy attorney can do for a client. Both Mr. Whitaker and myself are in San Diego, so either one us us could help you.

The trustee would not take your non-exempt assets to pay a secured debt like a mortgage, but those assets could be used to pay other creditors like credit cards. A qualified attorney would discuss with you how to maximize what you can keep.

Sometimes people will also consider a chapter 13 payment plan to avoid liquidation of non-exempt assets. If your house is worth less than the first mortgage balance, you might even be able be able to keep it and get rid of the second mortgage in a Chapter 13.

Finally, a bankruptcy discharge can prevent tax liability for any debt forgiveness income that might come from the short sale. However, there are many other factors to consider and getting a second opinion would be very useful yo you.

First, the firm is a debt relief agency according to the U.S. Bankruptcy Code. We help people file for bankruptcy. We also do other stuff and we do it well, but Congress wants me to post this notice. Second, nothing on this site is legal advice. You are not my client unless you enter into a written agreement signed by you and me.


Your questions are not unusual and reveal the reason why many people choose to involve the counsel and representation of an experienced bankruptcy attorney/law firm.

Bottom line: get a second opinion and hire someone you find confidence in to help you navigate the bankruptcy process; spending money on quality representation will save you money ( and save you headaches/ stress) in the years ahead.

Michael Salanick

NOTE: we can be reached at (310) 590-4575. This answer is made available by the lawyer for educational purposes only. By using or participating in this site you understand that there is no attorney client privilege between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed professional attorney with whom you have established an attorney client relationship. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question.

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