04/08/2008 05:12 am ET Updated May 25, 2011

Keeping Your House, But At The Expense Of Your Credit

For many people, filing for bankruptcy is seen as a scary, worst-case scenario, but consumer advocates say this last resort could be a real help for beleaguered homeowners.

There is no shortage of proposals in Congress to address the housing crisis: the Depression-era Federal Housing Administration is up for a makeover, and there are other plans to ease the stress of pricey mortgages. Under veto threat is a proposal that consumer advocates see as key to helping more people stay in their homes: allowing bankruptcy courts to modify troubled mortgages on primary residences.

Under current Chapter 13 bankruptcy law, courts cannot modify the mortgage on a principal residence, though they may for vacation or second homes. Consumer advocates and others see bankruptcy, which is meant to adjust debt and make it easier for people to repay creditors over time, as an efficient and established method for troubled homeowners to make good.

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