Peter~~great info! Yes, still in the house, foreclosure has not been completed. She got notice that the house is going up for auction in Nov.

Yes, bank can sue for mortgage amount not recovered in sale. That is why she wanted to do a BR. I did not mention that she has a second mortgage with a different bank who I guess can also sue. Ergo...bankruptcy might be necessary. She is afraid of wage garnishes and she barely makes enough income to feed her family as it is.

She was just afraid that the forgiven debt would be counted as income for 2011 for tax purposes as it would affect college loans/etc. I think that was part of my original question.

Birgit