Yes, a foreclosure can result in the cancellation of debt. When a lender forecloses on a property and sells it for less than the amount owed on the mortgage, the difference between the sale price and the outstanding balance is known as the deficiency balance. Sometimes, the lender may choose to forgive this deficiency balance, meaning the borrower is no longer responsible for paying it.
However, forgiven debt is generally considered taxable income by the IRS, which means that the borrower may be required to pay taxes on the forgiven amount. The lender will typically issue a 1099-C form to the borrower to report the forgiven debt to the IRS, and the borrower will need to include this amount on their tax return.
Not all foreclosures result in the cancellation of debt. In some cases, the lender may pursue a deficiency judgment against the borrower, which means they can try to collect the outstanding balance through other means, like wage garnishment or liens on other assets. The rules around deficiency judgments vary by state, so you should consult a qualified attorney to understand your options if you face foreclosure.