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You might have to report the income, since IRS got a copy of the firm and will expect you to report it. It doesn't mean you have to pay tax on it.
There are a couple of things that might act to offset the 1099 out allow you to exclude it from tax. One is the mortgage statement you will get from the bank. Income they pay you but keep to pay down your mortgage will create larger interest deductions. You might not have a tax to pay if this is the case.
Another way out is to disclaim this income from insolvency. This is very common now, and allows you to use form 982 to remove this income from your taxable income.
Best to review your specifics with your tax pro, to see which option is best for you.
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