Would like to know if a foreclosed house is sold for an amount less than the amount owed on the mortgage, will the owner receive a 1099 for the difference between the sale and the amount owed the bank who holds the mortgage?

Maybe yes, maybe no. The real question is whether there's taxable forgiveness of debt. Here's a link to the IRS "homepage" regarding the issue and special legislation:

http://www.irs.gov/individuals/article/0,,id=179414,00.html

This person is going to declare bankruptcy with the hope she will not be taxed on the difference and that it will not be counted as income.

On the personal relationships front, the forgiveness of debt explanation may have nothing to do with why this person is filing for bankruptcy. Something sounds off to me. She seems to know an awful lot about an arcane area of tax law to have missed the special provisions enacted as a reaction to the foreclosure crisis.

Phil
Rule Your Retirement Home Fool