My question involves bankruptcy in the state of: Michigan

My husband & I filed Chpt 7 in August 2009 and were discharged Nov 2009. We included both our 1st and 2nd mortgages which were both discharged and I have verified this on our credit report. We wanted to keep the house so I was working with the bank since April 2010 to get a modification. We have not made a payment to them since April 2009 due to the bankruptcy so they of course do not want to give us a modification since we are so far behind.

So now we have a sale date of 3/9 and we are trying to prevent it with a short sale. First my question is how can a foreclosure happen when the debt has already been discharged? Aren't they just taking the property back? I guess I don't understand.

My second question is if we do go thru with a short sale, am I going to get a 1099 and have to pay taxes on the difference? We owe more than twice as much as the market value. Would we be better off just to let the house go to foreclosure? The way I understand it that the bankruptcy protects us from owing any money with either a short sale or foreclosure.

Please help!
thanks