A default judgment is not a settlement.  Have they actually collected any of this?  Did this involve their own home, or one that they were going to sell or rent out?  

Damages for loss in value of property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement.

You can try IRS Pub 4345.