Utilizing the Colorado Homestead Exemption in Bankruptcy

July 27, 2011

By: David M. Serafin

Consistent with the premise that the Bankruptcy Code won’t allow creditors to seize, levy or garnish all of a Colorado debtor’s assets so that a “fresh start” in bankruptcy can be better realized, the Colorado Homestead Exemption allows for the protection of up to $60,000 ($90,000 for the elderly – age 60 or older – or disabled) of equity in a primary residence. Equity is determined by the Fair Market Value (FMV) minus the total debt owed for a first mortgage and/or second mortgage/Home Equity Line of Credit (HELOC). Chapter 7 and chapter 13 trustees in Colorado also allow hypothetical costs of sale, such as realtor and title costs, to be subtracted thereby lowering the equity.

An example will clarify: non-elderly bankruptcy debtor owns a primary residence valued at $400,000, with first and second mortgages of $250,000 and $60,000, respectively. I’ve been able to subtract 8% for realtor fees – 8% of $400,000 equals $32,000. Here, in either chapter 7 or chapter 13 bankruptcy, debtor will be able to keep the house (if able to keep making normal monthly payments outside of the bankruptcy) and will not owe any money to the bankruptcy estate.

But, what if only $30,000 is owed for the second mortgage in this example? Because of a higher homestead exemption in Colorado, an elderly or disabled debtor will still have no issues but other debtors will have too much equity in their primary residence. Here, a chapter 7 filing is dangerous because the chapter 7 trustee will attempt to either liquidate the property for the benefit of unsecured creditors or compel the debtor to pay back the value of this non-exempt interest within a very short time frame. (A non-bankruptcy filing co-owner of the residence will be first compensated by the trustee before any funds are remitted to unsecured creditors.)

Chapter 13 bankruptcy, which allows for the interest free repayment of non-exempt equity into a bankruptcy plan for up to 60 months, is much preferable for those with too much equity who intend to keep their primary residence. Note that the Homestead Exemption in Colorado does not protect rental property, commercial property or vacant land which may create a higher burden for the chapter 13 filer wishing to reconcile the non-exempt equity.

Particularly in today’s battered real estate market in the Denver area and most areas of Colorado, the inevitable question of how to value the property arises. In the bankruptcy world, a goal is to value the property as low as possible. The valuation cannot be fictitious but, as a Denver foreclosure defense lawyer, I always ask clients to consider factors reducing the value of a home such as foreclosures in the neighborhood, the value and length of time on the market for similar and nearby listings, and any necessary household repairs. Such a valuation, like a broker price opinion or appraisal, should be obtained before a chapter 7 or 13 bankruptcy is filed if there is an issue of potential non-exempt equity not covered by the Colorado Homestead Exemption.

Also, the Colorado Homestead Exemption protects a bankruptcy debtor who either voluntarily sells a primary residence with equity or receives surplus money from a foreclosure sale (after lien holders are paid) so long as the funds are segregated and kept for no longer than 2 years.