I received a 1099 Misc with a large amount of money in box 7 from my previous employer for the year 2010. A letter from an attorney was enclosed also stating "The amounts are being deemed as loans to you in 2004&2005 which are being written off in 2010. I have not been employed with them for 2 years.To compound the situation the company is out of business and going bankrupt. Called the attorney and got nowhere what can I do?

It appears that the company issued form 1099-misc for debt canceled by them.
Debt canceled is reported on 1099-C (instead of 1099-misc) and it should be reported as ordinary income on your tax return.

How do I correct this?

It is not easy to correct this. Call IRS.
You may file your tax return and claim the amount as debt canceled and report as income. You will not pay SE tax of 15.3%.
Also attach a statement with your tax return, why you are reporting 1099-misc income as debt canceled. Attach letter from attorney to prove your statement. Mail your tax return.

MukatA's recommended course of action seems to be the best way to go.