See #96 and please comment. Maybe I’m misinterpreting.
Insolvency has been on the books for a long time, and that is one possible way to avoid the tax consequences. However, in 2007, the US government passed a law that exempts debt that is canceled as the result of foreclosure or short sale on your primary residence from being taxed as income. As I stated in another post, there are a few restrictions, but from what I have seen, there is no means test. In other words, you don’t have to prove you could not afford the mortgage, just show that it was foreclosed or that you did a short sale, and that it was your primary residence.