New Colorado Bankruptcy exemptions in 2022

On April 7, 2022, Colorado Governor Jared Polis signed into law Senate Bill 22-086 which dramatically increases various consumer protections – most notably over a threefold increase to the amount of equity protectable in a primary residence per the Colorado Homestead Exemption. See https://leg.colorado.gov/sites/default/files/2022a_086_signed.pdf. The previous homestead exemption in Colorado protected up to $75,000 in equity for Bankruptcy Debtors under the age of 60 and $105,000 of equity for Debtors age 60 and above or who are disabled. Equity is defined as fair market value minus the payoff on a lien (such as a mortgage or car loan) and also minus modest hypothetical costs of sale (such as realtor fees and title insurer costs).

An obvious problem involved the exponentially increasing value of housing in Colorado over the past few years (in contrast to much more modest wage or salary increases). In particular, since the onset of the COVID-19 pandemic the Colorado real estate market skyrocketed in value due to limited housing inventory, low interest rates, high inflation, and the overall popularity and beauty of Colorado as more people have relocated and now work remotely. Within the past couple years, I’ve spoken to countless potential and actual Bankruptcy clients with household income below the allowable limit to qualify for Chapter 7 and who pass the Means Test but with too much house equity to protect their house in a Chapter 7 liquidation of their unsecured debts. Per the Denver Metro Association of Realtors, the median house value in the Denver metro area was $543,000 as of November 2021 – compare with Zillow showing the typical home value in the United States as $316,368 during this same time.

Many of these Debtors were required to instead file for Chapter 13 reorganization and propose a three-to-five year plan to unsecured creditors which involved repayment back of any surplus (i.e. above this $75,000/$105,000 homestead limit) residential equity. For instance, a non-elderly homeowner entering Bankruptcy with $100,000 of equity would be loathe to risk losing their house to a Chapter 7 Trustee and would instead propose to pay back the surplus $25,000 to creditors in Chapter 13 amortized for the three to five years. If the non-protected (i.e. non-exempt) equity exceeded the amount of unsecured debt, the Bankruptcy Debtor would be paying back 100% to unsecured creditors (albeit at either 0% interest or a very low interest rate).

Now, everything has changed. Going forward, you can obtain a Chapter 7 discharge in Colorado within three to four months of filing – without having to reorganize in a longer term Chapter 13 – if the equity in your house doesn’t exceed $250,000 (or $350,000 for those Debtors age 60 or above or who are disabled).

The higher cost of living in Colorado has more so necessitated ownership and usage of non-conventional housing (if used as an actual primary residence) such as trailers, campers, mobile homes, and tiny homes (whether movable on wheels or stationary on a foundation), which individuals who owned these items previously did not enjoy any protection from creditors. The new law approving Senate Bill 22-086 now expands the previously limited statutory definition of homestead to include these other types of dwellings.

Strangely enough, the pandemic also saw the unprecedented increase in vehicle values. You’ve surely heard the adage that a car loses at least one-third of its value as soon as it’s driven off the lot. Now this is not necessarily true given recent supply chain interruptions and lack of vehicle inventory. The previous Colorado vehicle exemption protected $7,500 of vehicle equity which is now bumped up to $15,000 which covers combined equity in up to two vehicles (with even higher numbers for elderly or disabled Debtors in Bankruptcy).

The approval of Senate Bill 22-086 also increases Colorado exemptions for the maximum amount protected in a bank account ($2,000) that cannot be garnished, household goods and furnishings for each Debtor ($6,000), tools of trade used in a primary occupation ($60,000), firearms and hunting/fishing equipment, economic impact/stimulus recovery payments, and health savings accounts (“HSAs”).

Note that this new Colorado law, will not change the necessity of filing for Chapter 13 in other traditional situations such as stopping a mortgage or HOA foreclosure, protecting certain non-exempt assets used by a business, paying back non-dischargeable tax debt interest/penalty free, cramdown of personal property with negative equity purchased over 910 day before the Bankruptcy filing, and/or needing to request Bankruptcy relief to financially restructure before the expiration of eight years between successive Chapter 7 filings.

For further clarification as to how to protect your homestead and personal property from creditors in a Chapter 7 or Chapter 13 filed on or after April 8, 2022 anywhere in the State of Colorado, please contact the Law Office of David M. Serafin.