Please see the IRS Publication 908 Bankruptcy Tax Guide - http://www.irs.gov/pub/irs-pdf/p908.pdf - with example of the form 982 on the last page.
Please be advised that you have only 6 month after tax return is due to file 982 form - so it is too late for 2004 - thus it may be used for your advantage to have debt cancellation in 2007. Please provide all above information to your tax preparer for considerations.
If canceled debt is indeed your taxable income - yes - that will likely reduce your refund.
However, if you was insolvent at the time of cancellation - and file a form 982 - to proof your insolvency - and do not need to include canceled dent into taxable income - and that will not affect your refund.
Insolvency is inability to pay debts or obligations because the amount of debt is more than the value of assets. A person may still have an excess of assets over liabilities, but be insolvent if unable to sell assets.
The purpose of the form 982 is to proof your insolvency - you would lest all your debt and all assets - and show your insolvency. That is a ground to exclude canceled debt from taxable income.