When a property is foreclosed, the creditor may obtain a deficiency judgment against you, representing the amount not paid on the promissory note, including attorney fees in connection with the foreclosure. The deficiency judgment is dischargeable in bankruptcy. The creditor will tell the IRS that this deficiency judgment was income to you but we can STOP this IRS action with proper procedures. If you file for Chapter 13 to repay your 1st mortgage the unpaid loan amounts are spread out over the length of your Chapter 13 plan, usually 3 years. If you make all your payments under the Chapter 13 plan, you will be all caught up.