Generally speaking, for your primary residence in 2012 or 2103, you don't have to pay taxes on this anyway.
The bank is required to issue the 1099, but you respond, as you noted, with a 982.
It would be a good idea to have a consult with a CPA or tax attorney (no, not a bookkeeper or tax service!) for good measure, given the amounts involved.
Also, if you do end up stuck with tax liability, there may be advantage in filing Chapter 13 prior to the tax assessment date, due to the way Chapter 13 handles tax penalties. This wouldn't be enough reason on its own to file a 13, but if you're already teetering on the edge, or if it's in your future, it's something to keep in mind.
The 1099-C is merely a reporting document, getting a 1099-C does not mean you will owe tax. A 1099-C merely reports to the IRS that a potentially taxable event occurred (forgiveness of debt).
You either qualify for an exemption to paying the tax, or your don't. If you don't, you will owe tax. All you can do is see if you qualify for one of the exceptions provided on Form 982.
I agree with the previous answers. Because of the amounts involved it is certainly in your best interests to pay for at least a consultation with either a tax attorney or a CPA, and either have them prepare your return or follow the recommendation. If you file the return yourself, you are more likely to face an audit.
Mr. Geisenberger is a Pennsylvania-licensed attorney only. The information is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. Answering this question does not in any way constitute legal representation. Contacting Jacques H. Geisenberger, Jr., P.C.,does not constitute legal representation, nor is any information you provide protected by attorney-client privilege.