This is going to be a big pain for you to deal with - but it seems like you have already been through a lot. I have outlined steps for you to take below. These only relate to how to file this on your tax return not any other issues (for example, I think the bank probably should not have issued a 1099C in this instance - but that is outside the scope of this answer).
The first thing you will need to do is create a separate schedule to report some items and write in on line 21 of Form 1040 "See attached schedule". On the schedule, you should list the income shown on the 1099C. On the next line, you should write "Amount excluded from income" and show the same amount as a minus so that the net is $0. Below that you should write a narrative, similar to what you have posted here, stating that the lender was acting in conjunction with the seller and, as such, $100,000 of this debt relief qualifies as a "purchase price adjustment". The remainder is excludable because, had it been paid, it would have resulted in a tax deduction of the same amount (for interest on a business debt). Then on Schedule C, you should show sales of $0 (unless you have other business income to report) PLUS any amount that you have actually received back from the builder or broker and, under cost of goods sold, list the total amount of out of pocket cost that you have with respect to the actual property. Based on the information above, this would be the $2,000 down payment. Then in the expense section of the Schedule C you should list your other expenses - interest, legal fees, etc - but only the amount that you actually paid out of pocket.
You should keep documentation with your tax files for this year of all of the facts listed here as well as (this is IMPORTANT) your intent to flip this property. That intent is what allows this to be treated as business expenses/loss rather than a capital loss combined with "expenses for the production of income" which are only deductible as itemized deductions.