Yes he loses the carryover loss. The reason being the cancellation of debt (COD) income is excluded in a specific order on the form 982. You must first reduce the tax attributes (basis, NOLs, and carry forwards) from the income before determining how much COD is attributed to the bankruptcy. So you can't just say wipe it all out with the bankruptcy and then still get to use the NOLs and/or passive losses. And since these were rental properties don't forget to dispose of them via form 4797 and do the depreciation recapture. There is the place some of those passive losses might come in handy. Remember the disposition is considered done before applying 982 rules. It can be really tricky and counterintuitive, please let us know if we can help.