The general rule is that you will realize taxable income from debt forgiveness. That's right, that money you got from a loan you no longer are legally obligated to pay, the IRS will consider as income to you, and tax you on it.
The Bad Mortgage Mercy Exception - an IRS Special (for 2007 - 2009)
Wall Street gets trillions (no, no typo) for screwing the pooch.
You on the other hand get, uh, nothing. Well, you get not to have to pay taxes on income you didn't really earn (you borrowed the money, yes, and spent it on something, but it wasn't like it was really free, right? Mortgages, foreclosure, short sales, debt collection etc. ad nauseum). The IRS will give you a break if you ducked out on your mortgage obligations by foreclosure, short sale, or loan modification but only if you did your ducking between 2007 and 2009
How To Beat The Reaper
Let's say you don't qualify for a free ducking by the IRS.
Ah - Bankruptcy is a friend of yours.
Debt forgiveness as the result of bankruptcy discharge generally is not taxable. Lucky you.
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