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The business will be treated as sold or disposed for tax purposes. The bank will issue a 1099A that you will use to complete form 4797 - Sale of business property. If the loan is not fully satisfied with the sale of business, the bank will issue you 1099C - Cancellation of debt that will be your taxable income.
If you receive 1099A and 1099C in the same year, than yes. But it is not always the case. It usually takes the bank several month to cancel the outstanding debt and issue you 1099C.
1099A is transfer of ownership from you to the bank
1099C is cancellation of the outstanding debt
Those are two separate tax events.
If you borrowed money against the business and are not repaying the loan, the bank has right to take away your property to satisfy the loan. The bank is not creating the mess. If, after bank sells the business, there's still outstanding loan, the bank forgive you the balance, meaning you do not have to pay it back but it will be treated as taxable income.
You can try to sell the business on your own instead of waiting for the bank to foreclose and sell it on an auction for 30 - 40% less than the actual value of your business.
Hold on. You are saying that the bank wants to foreclose despite you making loan payments?
Hm, I am not an expert in business law but it sounds like a case for a lawyer.