Fend off foreclosure

Preforeclosure sales This option helps people who can no longer afford their house. The bank allows the customer to sell the house for less than it was worth, and forgives some past-due interest. The amount forgiven varies, but Mr. Maness says it ranges up to 20 percent of interest due.

Whatever the terms, financial experts say proactive consumers find more grace with lenders than those who ignore late notices and avoid phone calls.

"There is leeway with the bank, but most Americans don't know it," says Fred Siegel, founder of the Siegel Group, a real estate development and consulting firm in New Orleans. "Banks are more much more lenient today than they were a decade ago because interest rates are so low."

Experts say the best approach is to be honest with the lender and negotiate a lower interest loan or an extended payment plan. Mercy abounds for borrowers facing a job loss, illness, or other unforeseen circumstances.

Yet there are limits. After homeowners fall three payments behind, banks forward such cases to an attorney. But foreclosure proceedings take up to a year in most states, according to experts, giving customers even more time to work out a repayment plan, save their home, and salvage their credit rating.

"If the bank thinks you are trying, then they will work with you," says Mr. Siegel. who recommends that troubled borrowers consider using nonprofit credit-counseling services to act as a mediator in the foreclosure process. "If they think you are avoiding the issue, then they are going to go on with the foreclosure."

When all else fails, legal experts say, file for bankruptcy.

"You don't want to file bankruptcy unless you have exhausted all the other options, because it stays on your record for years," says attorney Stuart Gordon, chairman of the bankruptcy and insolvency department of Shaw, Licitra, Bohner, Esernio, Schwartz and Pfluger, P.C., in Garden City, N.Y.

"The worst thing people can do is nothing," he adds. "You get legal fees, late fees, default fees, and before you know it, there are so many fees that you can't keep up."

Individuals with a source of income should file Chapter 13 bankruptcy, Mr. Gordon says, enabling them to keep their homes and work out a repayment plan with their creditors.

But experts warn that Chapter 7 bankruptcy is not as viable an option to hold onto a home as once it was. Higher property values have built substantial equity in many homes, giving lenders more to gain from foreclosing than in the past, says John Penberthy, chair of the American Bar Association's Consumer Bankruptcy Subsection.

"With the exception of Florida and Texas, no state exemption statute allows you to keep the house when a Chapter 7 is filed," says Mr. Penberthy. But "if a debtor has enough disposable income to catch the mortgage up within 12 months [since unsecured obligations, like credit-card payments, do not have to be made], a Chapter 7 is viable option to save a home."

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