What Happens To Your House During Bankruptcy

Some property is exempted from attachment. Homestead exemptions are state-specific. Let’s take a closer look at Colorado’s homestead exemption.

Individuals filing both Chapter 7 and 13 petitions may claim personal property exemptions. This is an important tool for debtors looking to hold onto any assets.

Though the Federal Bankruptcy Code recommends an exemption limit, states have opted to adopt their own statutes. The various limit amounts likely reflect the legislative intent and may be explained by relative home values.

For instance, Colorado is a “hybrid cyclical” real estate market. Whereas the state of Alabama is more of a linear market. The limit amount for Alabama is only $30,000 for a couple, compared with $250,000 for a Colorado couple. The prima facie difference is staggering.

Colorado’s §38-41-201 governs the homestead exemption. The statute section is refreshingly terse, and should be reviewed closely. For instance, the $250,000 amount goes up to $350,000 for disabled and elderly. The term elderly means ages 60 and over.

Of course, any rental properties would not fit the elements of the statute, as they aren’t occupied as a residence by the owner.

Remember, the calculation is that if your home has less equity than the exemption limit, you can keep your home. But if there is more equity than the limit, the Chapter 7 Trustee will likely be able to list the house for sale, with the debtor receiving money up to the exemption limit.

In that example, any additional proceeds go to the secured and unsecured creditors. It pays to understand your state’s exemption limits for homes so you can better assess your financial situation.

The property can usually be sold free and clear of liens, making it more liquid on the open market, but only where the property liens are adequately extinguished through the sale price. Clearly, this may not always occur where real estate values have dropped.

As always, nothing in this article shall be considered legal advice and no attorney-client relationship is assumed or formed by virtue of any opinions contained here.