If a homeowner is not able to exclude all debt cancellation based on the Mortgage Forgiveness Debt Relief Act, there may be relief to them if they can prove they were insolvent.  You are insolvent when (and to the extent) your liabilities exceed the fair value of your assets. You must determine your liabilities and the fair market value of your assets immediately before the debt cancellation in order to determine if you were insolvent and the amount by which you were insolvent.

For purposes of determining insolvency, your assets would include the value of everything you own (even including any assets that serve as collateral for debt and exempt assets that are beyond the reach of your creditors under law, such as your pension plans and the value of any retirement accounts you may have). Liabilities include the entire amount of any recourse debts and the amount of any nonrecourse debt that is not in excess of the fair market value of the property that is secured by the debt. You can exclude from your gross income debt canceled when you are insolvent, but only up to the amount by which you are insolvent.

Remember that the insolvency calculation is done immediately before the cancellation of debt.  This can be tough because in many cases the cancellation of debt occurred many months ago.  Just consider how difficult it would be to go back six months to a year in the past and try to determine the balance in your bank account and the value of your retirement account assets.  If fact, the most challenging part is determining the value of your household items and personal belongings, such as tools, jewelry, furniture, equipment, and clothing!

An insolvency calculation should only be done with the assistance of a qualified CPA.  It is just too difficult for the average person to do on their own.

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