When the housing bubble burst, millions of American homeowners were left owing more on their homes than their properties were actually worth. Collectively, American homeowners are now more than $700 billion under water.

Chapter 13 bankruptcy filers may soon have a way to get their mortgages back in line with their property values.

The Federal Housing Finance Agency is considering a proposal that would allow homeowners pursuing Chapter 13 bankruptcy to pay down the principal on their mortgages. Under the plan, homeowners would pay zero percent interest for five years following bankruptcy.

The option would only be available to homeowners with government-backed Fannie Mae or Freddie Mac mortgages. It would not automatically apply to every government-backed mortgage. Rather, the zero-interest modification would have to be specifically approved by a bankruptcy judge.

Both conservative and liberal housing experts say that solving the "underwater mortgage" problem is the key to rehabilitating the U.S. housing market. However, others worry that the proposal could unduly harm investors and lending institutions by cutting off a prime source of income.

The proposal has garnered support from a number of influential Congressional lawmakers including Zoe Lofgren of California and John Conyers of Michigan. Despite this, the Obama administration says it is not considering FHFA's proposal as part of its planned housing market fix.

However, the plan may go forward despite the president's objections. As an independent regulatory agency, FHFA does not need presidential or congressional approval to implement the proposal.

Even without this change, Chapter 13 bankruptcy is often the best option for struggling homeowners.

Homeowners who are worried that they cannot keep up with their mortgage payments should contact an experienced bankruptcy attorney who can help them understand all their options

Source: Financial Times, "U.S. Watchdog Eyes Zero Interest Mortgage Plan," Shahien Nasiripour, Dec. 20, 2011