How Bankruptcy in Colorado Affects Mortgage Debt and HOA Dues

April 7, 2011

By: David M. Serafin

In this tough economy, many homeowners and potential bankruptcy clients in Denver and all of Colorado are forced to make a difficult decision whether to keep their home. During the initial consultation – whether for chapter 7 or chapter 13 – as an Arvada foreclosure defense lawyer, I will address the pros and cons of keeping or surrendering a house in bankruptcy. For many clients, the question is not can I keep my home, but should I keep the home?

For clients who have equity in their house (as measured by fair market value minus both mortgage debt AND realtor costs, it rarely makes sense to surrender a house. The Colorado Homestead Exemption protects up to $60,000 (or $90,000, if elderly or disabled) of equity in a primary residence under either chapter 7 or chapter 13.

Second homes or rental properties are not protected by the Colorado Homestead Exemption, thus any equity is non-exempt. This means that chapter 13 is preferable for a bankruptcy debtor who wishes to keep an additional property with equity as the non-exempt equity can be paid back over 3 to 5 years, as compared to the property being sold by a chapter 7 trustee.

In comparison, other Colorado homeowners in bankruptcy are upside down or have negative equity one or more properties. Some also owe past due HOA fees. For a bankruptcy debtors who intend to surrender their home (or even a second property), whether the entire mortgage deficiency and/or pre-petition HOA dues can be discharged depends upon their income/expenses and whether chapter 7 or 13 is filed.

For those who pass the Means Test and file for chapter 7 in Colorado, the entire mortgage deficiency and all pre-petition HOA dues attributable to a surrendered home can be discharged. However, for higher income debtors who file for chapter 13, the amount required to be paid back can range from 0% to 100%, depending on your entire financial situation. The debt attributable to a surrendered home is deemed unsecured (because the collateral has been or is about to the foreclosed upon), similar to credit card debt or medical bills. The Means Test requires that chapter 13 bankruptcy debtors pay back 0% to 100% of their unsecured debt in order to obtain a discharge within 3 to 5 years after filing.

Conversely, debtors in Colorado intending to keep their home must continue to make the regular monthly mortgage and HOA payment, or else risk foreclosure. Those behind in mortgage or HOA payments can cure the arrears as part of the chapter 13 plan while simultaneously continuing to make the regular payment outside the bankruptcy.

Similar to a mortgage debt, HOA dues are secured by the property. In other words, an HOA can pursue foreclosure in the event of a default. Even though bankruptcy discharges personal liability for all or a portion of the pre-petition HOA dues incurred (depending on the chapter), the HOA retains a lien against the property which must be satisfied to keep the home.

Note that the Bankruptcy Code requires post-bankruptcy petition HOA dues incurred to be paid back, even after the property has been surrendered, until the mortgage lender or bank re-sells the property to a third party.