You are not responsible for the excess money in a non-recourse loan; however, this is still very bad for the borrower, because the difference between the bank sale and the loan value is considered normal income to the borrower and is taxable.
In this case, the person would have $550,000 of taxable income that year even though he only made $100,000 from his job.
THat was poorly worded:
Basically for the borrower, you take the value of the loan ($500,000) and subtract the amount the bank sold the home for ($50,000). The resulting amount is considered as part of the borrower's income even though the borrower never received that cash... so you're adding $450,000 to your personal income for hte year and you have to pay taxes on that.
It would be a crappy situation, which is why a lot of people have many problems even after they negotiate new terms with their lender to avoid being kicked out of their home. The family is still partially responsible for the difference between the old loan and new loan because that amount is considered taxable income.
I used to deal with this a lot when I worked at the IRS. Most Americans have NO idea they owe taxes on debt forgiveness. Some people were excessive and yeah should be punished this way, but I've also come across people who didn't have sh**t for income and still got hit with the tax bill. I've even had a few cases where they didn't even make enough earned income to file, but got socked with debt forgiveness. It's like getting blood from a stone.
