Although a bill passed in the House of Representatives in early 2009 permitting bankruptcy judges to modify mortgages on your primary residence (so-called cramdown legislation), this bill – even after many amendments narrowing the circumstances in which mortgage modification can be applied – did not pass in the Senate, forcing many home-owners into foreclosure. There is, however, a new government program that seeks to mitigate the rapidly growing number of foreclosures. The so-called “Making Home Affordable Program” includes opportunities to modify or refinance your mortgage to make your monthly payments more affordable. It also includes the “Home Affordable Foreclosure Alternatives Program: for homeowners who are interested in a short sale or deed-in-lieu of foreclosure.

If you do end up filing for bankruptcy, depending on whether you are filing for Chapter 13 or 7 Bankruptcy and depending on how much equity you have in your home, you have several options to lower your mortgage payments. Rarely, in some Chapter 13 Bankruptcy cases “Mortgage Stripping” or “Lien Stripping” may be considered. This only applies if you have two mortgages on your home and the home is worth less than the first mortgage. The second mortgage can then be stripped off by filing a Chapter 13 Bankruptcy.

If you have equity on your home, you may ask for forbearance when filing Chapter 7 – a lender is more inclined to force you into foreclosure when significant equity is present. Beware, that in a Chapter 13 Bankruptcy, where your debts are consolidated, your payments may actually increase.

If you don’t have any equity in your home and know your financial situation is only temporary, you can also negotiate a forbearance agreement, where payments are suspended for a period of time, typically for a time frame of six months, to be paid in larger sums in the future. This option is the most cost-effective for the lender.

Because foreclosure is a very expensive proposition to any lender, the lender may be amenable to a loan modification, where the lender can lower the interest or extend the duration of the loan in order to reduce monthly payments. The lender may consider a loan modification in cases where this would cost the lender less than foreclosure proceedings.