Hi and welcome to Just Answer!
If the forgiven debt is excluded from your federal tax return - it would be also excluded from Massachusetts state income tax return.The amount of debt forgiven is reportable on 1099-C - http://www.irs.gov/pub/irs-pdf/f1099c.pdf - generally is taxable, unless any exemption apply -- you should file a form 982 - www.irs.gov/pub/irs-pdf/f982.pdf - to proof your exemption - and might exclude all or part of canceled debt from taxable income.
The Mortgage Forgiveness Debt Relief Act of 2007 allows for federal tax purposes an exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. You still need to fill the form 982 and attach it to your tax return.
If that was your main home - you do not need to be insolvent to exclude the debt.
If that was NOT your main home - but you are insolvent - and may exclude the forgiven debt from your taxable income.
Let me know if you need any help.
You are right you are exempt from Cancellation of Indebtedness income due to insolvency. In addition, Massachusetts recognizes IRC 108 and the insolvency exception. The state does not have any separate form, but if they contact you, you would send them your IRS Form 982 .
I am a Massachusetts accountant and have never known the state to ever follow up on this and I have a LOT of clients with 1099-Cs.
It's NOT income in Massachusetts so you simply do not report it.
Please see my last answer, Massachusetts does NOT follow up on this as they are aware that there are exceptions and they don't have a Form 982.