You probably need legal help.
In summary, the Mortgage Forgiveness Debt Relief Act states that if you borrow money (up to $2 million dollars) from a bank or a commercial lender and the lender cancels or forgives the debt then you are not responsible for paying taxes on the forgiven amount. This applies only to primary residences, NOT investment properties.
The Mortgage Forgiveness and Debt Relief Act applies to debt forgiven in calendar years 2007 through 2012. It has not yet been determined if the Mortgage Forgiveness Act will be extended past 2012.
Your bank is required by law to provide the IRS with a Form 1099-C. The 1099-C will show the IRS the amount of debt which was cancelled or forgiven. Before December 20, 2007, (this is the date which the Mortgage Forgiveness Debt Relief was enacted) the amount of forgiven debt was considered to be taxable income. This is no longer the case for primary residences; however, all this could change if the Mortgage Forgiveness Act is not extended.
There is a tremendous amount of mis-leading and â€œcompletely falseâ€ information floating around on the internet. Of course as a Realtor, we are not licensed to give tax advice, and thus will strongly suggest that you always consult with a licensed CPA or attorney when dealing with these matters; however, please click the attached link to view the Mortgage Forgiveness Debt Relief Act as it appears on the IRS web site (click link) http://www.irs.gov/individuals/article/0,,id=179414,00.html
But, I would bring up the thought; Do you have a lot of hidden assets, and does the Bank know about them?
I've heard that they have 4 years to file; that may vary from state to state.
If I were you, I wouldn't check; it might put you on their radar.
Have you thought of moving to Montana and changing your name?
This is an area of great concern for millions of ex-homeowners, and only a local Real Estate Attorney can answer you; one who has experience in Deficiency Judgements, (which I doubt that there are any.)
Good luck and may God bless