Foreclosure first then I.R.S. troubles

Saw an article in the Times about the large tax bills that foreclosure victims receive after the foreclosure is done...ostensibly for debt forgiveness.

The 1099 shortfall, as it is called, stems from an Internal Revenue Service policy that treats forgiven debt of all types as income even if the taxpayer has nothing tangible to show for it, unless the debt is canceled through bankruptcy.

Interesting, I wasn't aware of this potential. I've had these 1099s in divorce cases personally where we'll try to negotiate down some debts and then the party would receive a 1099 for the debt that was forgiven. But other than the situation where the mortgagor owes more than the value of the house, why should the foreclosed party be getting a 1099 for debt forgiveness?

The article makes is sound like the lenders can really manipulate this based on the appraised value of the real estate.