You didn't mention whether you can afford the payments and you are making them currently. What I have been seeing with regard to balloon mortgages is that so long as you've been making the payments most lenders are willing to modify the loans into a fixed rate. It makes sense from the banks perspective because they don't want to take on any more foreclosures than is absolutely necessary.
While it's true that a deed in lieu of foreclosure will not affect your credit as much as letting it go into foreclosure, be advised that it will negatively reflect on your credit scores and it will prevent you from getting another mortgage for at least 3 years.
With that being said, before filing for bankruptcy or letting the home foreclose you should speak with an attorney who will be more capable of addressing your concerns.
This is a difficult situation, and you are not alone in this circumstance. Best of luck with moving forward.
You may not need to file a bk if your lender is willing to accept a deed in lieu of foreclosure. If you have a bunch of credit card debt and your lender wants to go after you for a deficiency judgment then perhaps a bk is an option.
You have to ask yourself some questions?
Do you want the house?
can you afford the payment?
If your credit is bad a refinance is not an option but perhaps a loan modification is?
Is it better to deed the house back to the lender and buy something cheaper in a few years?
How is your lender going to foreclosure on you?
Do you have a recourse loan or a non-recourse loan?
In any case, Good luck!