Ideally, the proceeds from the sale will cover your mortgage and selling costs. But if they won't, ask your lender to consider what's called a "short sale." That means the lender accepts the sale proceeds even if they're less than the amount you owe.

Handing the Deed Over to the Lender

If no one is interested in buying your house, your lender may agree to take the deed and cancel your debt. This is called a deed in lieu of foreclosure. The idea is that the bank can then sell your house (as with an actual foreclosure) but won't report it as a foreclosure to the credit rating agencies -- in fact, you can negotiate with the bank about how it can help you preserve your credit rating.

Short sales and deeds in lieu of foreclosure will no longer leave you owing taxes. In the past, the IRS considered forgiven debt to be taxable income. However, this was erased for situations where the loan was for a primary residence, by the "Mortgage Forgiveness Debt Relief Act of 2007," or H.R. 3648.

For more detailed information on how bankruptcy can help you if you face foreclosure, get Chapter 13 Bankruptcy: Repay Your Debts, by Robin Leonard (Nolo). Also, Robin Leonard's Solve Your Money Troubles: How to Get Creditors Off Your Back and Regain Financial Freedom (Nolo), contains everything you need to know to get out of debt and repair your credit.