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I have seen quite a few loan mods under HAMP that is the government supported program. They all have one thing in common the refusal of the borrower to take no for an answer.

Among the absolute worst things to do is to borrow against a retirement plan to pay off unsecured debts such as credit cards. This occurs to me now because the clients I saw today all did this. It hurt them in different ways. Several reduced their take home pay so much they had trouble paying mortgages and car loans. But the last person of the day lost his job after the loan from his 401k and was unable to pay back. He now has a big tax bill. Never borrow from your 401k to pay debts I have never seen a good result.

There is no tax on a mortgage foregiven in a bankruptcy, but there may be no tax on a home mortgage foregiveness after 2007 which is when congress passed the Mortgage Forgiveness Debt Relief Act. Before you pay taxes on 1099 income for a short sale chech and see if you are eligible for this relief.