Don't try to outsmart your debt or take the easy way out... attack it. 

Yes, it cost some money, but it will let others know these people are debtors and not good tenants. 

The United States is the biggest debtor in the world.

Quote from @Tom Gimer: Sounds like transferring record title from the estate to heir/heirs which should have occurred would have subjected the property to immediate attachment (and may have regardless of the inaction).This problem scenario cannot and should not be solved in an online forum.In layman's terms- the IRS or other judgment debtor may scarf any assets / attach liens to anything the BIL acquires or has an ownership interest in. 

Does the lender or the debtor initiate the 1099-INT in a family situation like this?

Upon filing the adversarial, it's likely that his attorney would look at the numbers, and tell the borrower if it made sense to go through the lawsuit, which the bankrupt would have to pay legal fees out of pocket, ( the attorney wants to get paid) or to call "game over" and let the property go.Normally I look at the intent of the filing, is it to stop a foreclosure with no way to pay the debt or is it to get rid of a large amount of other debt.

Does it make sense to spend $ to chase this debt or no? 

I believe that while you are in a Chapter 7 you are not allowed to take on debt or buy properties without court permission.

If we find a seller financed deal where they have no debt or the down payment would pay off the debt on the commercial side then I typically structure this way.5 year fixed debt in the 4's for 30 year amortization. 

And if so, does the seller get that money above and beyond the debt? Or