You need to see an attorney who is experienced in real estate law for proper advice.
Arizona is a non-recourse state, meaning if a mortgage loan was 'purchase money' to buy the home, then the lender cannot pursue you for the deficiency. HOWEVER, if your HELOC loan was NOT purchase money, then you could very well be in toruble.
Once again, this is not a legal forum, and this is not legal counsel. Reach out to a competent attorney right away.
I have given Thumbs Up to both Randy and John. Tim, the 1099 part is correct if there is "forgiveness of debt" involved, but the rest is scary! Way too many variables for anyone to accurately answer this question.
Once again, I recommend people in Arizona with these types of questions call Kristi Collins at the Scottsdale Law Group as this is their area of specialty. She can be reached at: firstname.lastname@example.org or 480-478-0709.
Tough situation. Best to know your options and rights, than wing it with ad hoc advice from amateur attorneys.