I know you're just gathering opinions, but on something like this, the best advice is to make an appointment and sit down with a lawyer to discuss the financial implications of your decisions. You may or may not have to file bankruptcy. That's something you should know before you spend a lot of money trying to save something that can't be saved.

The debt forgiven act is focused on the tax of the debt forgiven not the bank forgiving the short fall. The bank actions on forgiving losses will depend on the bank, if the debt is recourse or non recourse, and how the bank forecloses on you. I would suggest that you contact your bank to see if you can modifiy the loan on your primary residence to see if you can stop the loan adjusting in the future. There is no reason to let the bank forclose without trying to look at your options if you wish to keep your property.

Below is the link for the debt foregiviness act writen by the IRS

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



Keith Manson
First Weber Group
Certified Distressed Property Expert
Greenfield,Wisconsin

This is a complex set of circumstances, and the answers may depend on whether your primary residence has recourse or non-recourse debt on it. In most cases, the original purchase loan is non-recourse, whcih means the lender has no other recourse besides the collateral for the loan, i.e. the subject property. On the other hand, if you re-financed and took money out to buy the investment property, or used a home equity line of credit to buy the 2nd home, you probably have recourse debt. If so, the noteholder has "recourse" against your other assets.
It also sounds like your primary residence may be too far underwater to qualify for the Debt Forgiveness Act provisions, as I understand them.
Your best bet at this stage is to review all your loan docs with a qualified real estate or mortgage professional, and get their opinion.