If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
Expect the bank to issue you a 1099 if your home has been forclosed on or short saled. Expect a 1099 if you filed for bankruptcy. A 1099 shows the dept that was either forgiven or canceled. Make sure you acknowledge this on your tax return in the year the dept was forgiven or canceled and consult with a CPA.
Here are some links that are very helpful in understanding reporting canceled or forgiven dept for a short sale,foreclosure or bankruptcy on your tax return.
Tax Consequences When a Creditor Writes Off or Settles a Debt
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
IRS Form 4681
IRS Form 982
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