I have been asked more and more what the effect of bankruptcy is on a foreclosure.  As a California attorney i want to limit this discussion to California residents, although the laws in other states are likely similar.  A bankruptcy filing stops all foreclosure proceedings.  This is true even if it is filed the day of the Trustee sale.  What we are seeing more of is the benefits of a Chapter 13 filing.  In a chapter 13, a payment plan is arranged with a trustee.  Essentially credit is categorized (secured and unsecured) and a plan is setup to satisfy debt obligations.  The plan is 3-5 years in length.  In the case of 2nd mortgages that are effectively unsecured due to declining property value, they can be treated as unsecured, just like credit card debt.  The significance of this is that at the end of the plan unsecured debt can be completely discharged.  This can be a favorable result and arguably the best "loan modification" available to someone.

It is important to consult with a bankruptcy attorney when dealing with these issues, as they can be complex at it is important they are done correctly.  The laws are also continually changing, but a good attorney can be a great resource.