In the mid 2000s, houses were sold at the high end of the market, but by 2008, the bottom fell out. Many homeowners were impacted, none more than those who owed more than their home’s value.

Some people walked away from their mortgages, allowing the lender to foreclose; others hung tough but still face the fear of house foreclosure.

In a tough economy, there are several positive steps you can take to work with your lender to avoid foreclosure:

Negotiate to Avoid House Foreclosure

The lender may be interested in the foreclosure process too. The sooner you approach your lender, the more likely they’ll work with you on a payment plan. If you are recovering from job loss or unexpected medical bills, the lender may have assistance options that may extend your time to repay the loan, change your interest rate, or switch from an adjustable to a fixed rate. Don’t lose time: Some state laws allow lenders to move quickly to foreclose.

Seek Government Relief to Avoid House Foreclosure

See if you qualify for the government’s Making Home Affordable program, which may help those struggling with monthly house notes after such hardships as a decrease in wages, high expenses, or suddenly hiked adjustable-rate mortgage bills. Homeowners who are approved for one of the MHA programs may be able to – among other options - keep their current loans but cut payments to as low as 31 percent of before-tax income.

Two caveats of the program are its elaborate rules and its limited duration.  Each government program has its own set of rules. Many have strict time frames.  Talk to a participating lender or seek professional advice as quickly as possible.  Do not wait until foreclosure proceedings have begun, as there may not be sufficient time to complete the application process for one of the government programs.

Contest House Foreclosure

If you live in one of 22 “judicial foreclosure” states, the foreclosure proceedings take place in court and are initiated by the lender, and it can take months before the lender is able to secure from the court a final judgment and the property is put up for auction.  During these proceedings, the borrower may raise various defenses and other arguments as to why a finding in favor of the lender is not proper.  In non-judicial foreclosure states, a borrower may need to file suit against the lender in order to avoid foreclosure.

Consult with a reputable debt protection attorney who understands the laws and is accustomed to working with lenders on behalf of homeowners. If an attorney is outside of your current economic means, contact the National Association of Consumer Advocates, or the National Association of Consumer Bankruptcy Attorneys.

Hold a “Short” Sale on Your House

You may be able to sell your property before a foreclosure auction date if you send in all your necessary documents in time for the lender to review and approve. If you can’t sell the property for the amount you owe, the lender might accept a smaller sum than your mortgage balance. Depending on eligibility, you may also be able to transfer ownership of your property to the lender in exchange for a reduction in some or all of your debts. Talk to an accountant and perhaps an attorney before accepting a deal, as you may owe more taxes due to the forgiveness of debt. Do not sign the property title to anyone other than the lender.

Bankruptcy Might Be a Final Option

Declaring bankruptcy should be your last resort. Yes, you may be able to keep your primary residence with Chapter 7, but you can lose all other assets. Chapter 13 bankruptcy allows you to keep your assets and repay your debts within three to five years, under court supervision.

Whether you are facing foreclosure or bankruptcy, you stain your credit report for at least seven years for foreclosure and up to a decade for bankruptcy.

Learn from Your Mistakes

Review your financial situation and determine if downsizing is an option.  There is a recent housing trend: Buy smaller. Lower monthly mortgage bills and lower maintenance and upkeep costs will lead to less fretting about funds.

Win or lose your foreclosure fight, remember that you can rebound stronger and wiser.