There was a time when lenders didn't want to work with you if you couldn't pay. Now they want to avoid foreclosure, lawsuits or repossession almost as much as you do.

By Liz Pulliam Weston
 
People who overdosed on debt in recent years learned the paradox of easy credit: While lenders were willing to let you borrow copious amounts, they weren't particularly interested in helping you work out a solution if you fell behind on repayment. Lenders often found it easier and cheaper to write off delinquent accounts as bad debt than work with you on a repayment plan. After all, they could get a tax break on the loss and then get on with the profitable business of extending credit to the next guy. Lately, however, lender perspectives have changed. Soaring default rates, a weakening economy and the credit crunch have rewritten the rules.

• Credit card lenders charged off 5.47% of the total amounts owed on cards as bad debt in the second quarter, according to the Federal Reserve. A year ago, the charge-off rate was 3.85%.
  
  
• Consumer bankruptcy filings in October topped 100,000, a 40% increase from a year earlier and the highest level since the federal bankruptcy reform law took effect in October 2005, according to the American Bankruptcy Institute.
  
  
• More than 2.2 million homeowners are more than 60 days late on their mortgage payments, according to the Hope Now alliance of lenders and credit counselors, and one in six homeowners owes more on a home than it's worth.
  
  
• With home prices plummeting, every foreclosure now represents a loss of 44% of the original loan amount, up from 29% a year ago, according to data from LPS Applied Analytics.

That's why lenders are now looking for ways to keep people paying their bills, even if it means forgiving some of their debt. Now the paradox is that in order to qualify, you must be struggling, but not so much that a change in terms wouldn't help you.

How the new programs work
The most sweeping new program was announced Nov. 11. Freddie Mac and Fannie Mae, the government agencies that guarantee 31 million U.S. mortgages, will begin paying the mortgage service companies that maintain the loans $800 for every loan they modify. Borrowers would get help in several ways: Interest rates would be reduced so that borrowers would not pay more than 38% of their gross income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free. (You can find more details here.) The same day, Citigroup announced it would halt foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments. Ultimately, it plans to modify the repayment terms on up to $20 billion in loans.