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What happens to my nonexempt assets if I file Ch 7 BK and then short sale or foreclose on my property?

San Diego, CA |

My property is currently underwater and I am considering short sale/foreclosure. If I short sell, I will be subject to taxes. It is my understanding that a Chapter 7 would avoid such liabilities. I have assets that are outside the allowable CA exemptions. Other than my mortgage, my debts are about $1,000 in credit cards. I know that the $1,000 can be paid from my nonexempt assets, but only in the amount that I owe ($1,000). My question is if I file Ch 7 BK, can the trustee take my nonexempt assets to pay the tax liabilities or the unsecured portion of my mortgage if I short sell of go through foreclosure?

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Attorney answers 5


Taking your information at face value I would say let the house go into foreclosure and pay your credit card off. CA in a non-recourse jurisdiction so the only option the bank has is to foreclose. They can not come after you personally. Your situation could be much more complicated if you have refinanced your home or have more than one mortgage on it, etc. Get a consulation with one of your local attorney

Remember that on this forum attorneys try to answer your questions with limited facts available to them. My answer should in no way be considered legal advice. No attorney client relationship has been formed by any answer given here.


Filing for $1K in debts makes no sense, and any taxes associated with the property should follow the property presuming they are property taxes. If you are subject to other taxes I'd be interested to know what you are talking about and where your concerns lie.


In CA, if the mortgage is a purchase money loan, then it is non-recourse loan. However, if you have refinanced or have a second mortgage, the loan may be recourse. It would be wise to have an attorney read through your loan documents. Further, there may be tax consequences if the property forecloses outside bankruptcy. Sometimes lenders will send you a 1099 for balance, if they write off the loan. I would suggest speaking to a local attorney, who can look through the loan documents to see if the loan is recourse or non-recourse. I'm sure there are many local bankruptcy attorneys who are capable of reading the documents and advising you on your best course of action, or at least giving you all the options. Good luck!

The information above is not intended to, nor does it constitute legal advice.


This is what I understand from your brief facts: 1. You have a 1st loan which could foreclose. 2. You have a 2nd loan on which you may be liable if the 1st forecloses and you want to avoid liability on this loan 3. You only owe $1,000 on other debt and 4) you have some non-exempt assets.

Your issues appear to be: 1. Avoid income tax on the 2nd debt if you short sell or discharging the 2nd debt if the property is foreclosed

Here is what you need to do.
A short sale will be with the approval of the 2nd and this will eliminate the short sale debt and avoid the necessity of filing bk for the purposes of discharging this debt. You do,, however, have a income tax consequence which can be eliminated if you are insolvent . Your accountant should be able to assist with that (IRS Form 982) BUT you say you have non-exempt assets and this may prevent you from claiming the insolvency exception.

If this is the case you need to file bankruptcy BEFORE the house goes into foreclosure and BEFORE you short sell.

I have attempted to give you a comprehensive answer but this is not a substitute for legal advise so do contact an attorney who understands bankruptcy and taxes.

Legal disclaimer: Disclaimer: This answer does not constitute legal advice. I am admitted in California and Pakistan only and make no attempt to opine on matters of law that are not relevant to California or Pakistan. This advice is based on general principles of law that may or may not relate to your specific situation. Facts and laws change and these possible changes will affect the advice provided here. Consult an attorney in your locale before you act on any of this advice. You should not rely on this advice alone and nothing in these communications creates an attorney client relationship.


No tax liability for some loans secured by your primary home --- In the past, homeowners using short sales or deeds in lieu were obligated to pay tax on the amount of the forgiven debt. However, the new Mortgage Forgiveness Debt Relief Act of 2007 changes this for certain loans during the 2007 through 2012 tax years only.

Bankruptcy to avoid tax liability --- You can also get rid of this kind of tax liability by filing for Chapter 7 or Chapter 13 bankruptcy, if you file before escrow closes. Of course, if you are going to file for bankruptcy anyway, there isn't much point in doing the short sale or deed in lieu of, because any benefit to your credit rating created by the short sale will be wiped out by the bankruptcy.

Please see a more comprehensive blog post on this subject at or click on the link attached.

This does not constitute legal advice and is for informational purposes only. No attorney-client relationship has been formed. Alex Zarcone, Esq. The Zarcone Law Firm 4370 La Jolla Village Drive, Ste. 655 San Diego, CA 92122 619-800-3082

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