If you are insolvent, meaning that your liabilities exceed the fair market value of your assets, you may be exempt from claiming all or some of the income you received on the 1099 for debt relief. You claim your exclusion on Form 982. For further information take a look at IRS Publication 4681. The form and publication can be found at www.irs.gov.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.
You should have your CPA or tax attorney review your situation, because the insolvency requirements are somewhat complex. The fact that you could not afford the home is not relevant to the tax treatment of your foreclosure.