To add my two cents, banks can also forgive the loans if they so choose. However, when this happens, the borrower will get a 1099 by the end of January the following year so that the borrower must then report the forgiven funds as income and pay the taxes from it.
For example, let's say that you the forgiven amount was $50,000 and you were given a 1099 for it. This would mean that you would need to pay, depending on the tax bracket your in, up to and perhaps over $10K in taxes. And remember, all levels would need paid. Federal, State and local.