Adding Insult to Foreclosure

A homeowner owes $200,000 and for whatever reason, finds he can no longer pay the mortgage. The bank accepts the deed in lieu of foreclosure and sells the house for $150,000. The homeowner breathes a sigh of relief to be out, but in January receives a 1099. He now has taxable income for the amount of money he cannot afford to pay the bank. Surely the tax on $50,000 is a better deal than the whole $50,000, but for the guy who couldn’t come up with the $1500 mortgage payment each month, where is he supposed to find the $12,500 (I’m assuming a 25% tax bracket) to pay the tax due?
Congress is considering legislation that would change the law that taxes the loan amount which goes unpaid, but that’s not likely to happen overnight.
Enjoy the weekend,
JOE