The 1099 issue is really not that difficult unless the people doing a short sale have lots of money (how often is that the case?).
Under the IRS rules for a 1099-C (Cancellation of Debt) you can be excused from the liability for two reasons; Either you are currently or previously have declared bankruptcy on the debt that was canceled and or settled. Or, If you are insolvent and can demonstrate your insolvency to the IRS by making a comparison of your assets to your debts. If your debts exceed your assets and income you are by definition insolvent and can ask the IRS to absolve the 1099-C.
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