Recent change in Washington state law offers a possible way for some homeowners facing foreclosure to file bankruptcy and stay in their homes.

The homestead exemption was created to protect families from losing their homes in hard times. It makes bankruptcy a safety net that could keep the roof over your head even if you're facing foreclosure.

The new law aids homeowners who file for bankruptcy by protecting $125,000 of their home equity from creditors. That equity is not protected from your mortgage creditors but depending on your circumstances, filing bankruptcy may enable you to restructure your mortgage payments and other debt, and as a result, stay in your home.

Say your home is worth $500,000 and the balance on your mortgage is $350,000. That's $150,000 of equity.

Under the homestead exemption, $125,000 of that equity is untouchable; that equity is automatically protected from creditors. Any creditor liens against your property take a back seat to your mortgage. The liens are essentially suspended until the time you elect to sell the home.

The money is intended to provide homeowners with resources to make a fresh start. The homestead exemption has been around for years in Washington, but until last summer equity was only protected only up to $40,000. State lawmakers increased that amount to $125,000 to keep up with rising home values.

The concern is that people don't realize that even in some foreclosure situations, the homestead exemption may be a way to file bankruptcy, restructure your mortgage payments and keep your home.

So it's crucial that you contact reputable, local housing counselors as soon as you know your home is in jeopardy.

Also keep in mind that bankruptcy should be treated as the last resort when you're in debt. However, for many homeowners it may be a way to keep paying your mortgage, and keep your home.

As always, stay away from foreclosure rescue lease-back offers.

For more information on the Homestead Exemption:

U.S. Bankruptcy Court

Final Bill Report

Homestead exemption when not available

Local housing counselors:

Tips for Avoiding Foreclosure

Housing Counseling