One of the most common questions our bankruptcy attorneys receive from potential clients is: can I keep my house if I file for bankruptcy? In most cases, the answer is: yes. However, you need to be able to continue to make your mortgage payments.
In this article, we delve into how you are able to keep your house if you file for bankruptcy, and we specifically cover Colorado’s homestead exemption rules.
Colorado Bankruptcy Attorneys
If you are facing mounting debt and want to find out if bankruptcy is the right path for you but you’re concerned about losing your home or the equity in it, call 303-688-0944 to begin your case assessment.
Colorado Homestead Exemptions and Bankruptcy
Under Colorado law, a homeowner is entitled to protect some of the equity in their home. This is called the homestead exemption, and bankruptcy filers can take advantage of this exemption to prevent the sale of their home through bankruptcy.
Colorado Homestead Exemption Rules
On April 8, 2022, Gov. Jared Polis signed into law a bill that increases Colorado’s homestead exemption, expands what is considered a home, and, thereby, broadens who can benefit from it. Let’s take a look:
What is the Purpose of the Homestead Exemption?
The purpose of the homestead exemption is to protect the equity required to keep a person and/or their family housed.
What is Considered a Homestead?
A homestead is considered a dwelling, a house or lots, mobile homes, trailers, trailer coaches, and farms.
The 2022 changes to the homestead exemption rules also redefine what a dwelling means. In addition to conventional housing, a dwelling includes personal property that is used as a residence including:
- vehicles, including trailers
- camper coaches
- anything permanently mounted on a vehicle
- railway cars
- shipping and cargo containers
- tiny homes – stationary or moveable
How Much Equity Can I Protect?
If you or a family member are living on your homestead, you can protect up to $250,000 of the property’s equity. It’s important to note that you or a relative must be living in the dwelling in order for you to take advantage of the homestead exemption.
Now, the exemption increases to up to $350,000 for elderly and disabled people. If the owner is elderly or disabled and living in the home, then they qualify for the increased exemption. Additionally, if the owner has an elderly or disabled spouse or dependent living with them, that, too, qualifies the owner for an up to $350,000 exemption.
Now let’s take a look at how the homestead exemption applies to your home during bankruptcy.
Keeping Your House in Chapter 7 Bankruptcy
How Chapter 7 Bankruptcy Works
When you file a Chapter 7 bankruptcy petition, the bankruptcy court assigns a trustee to administer your case on behalf of your creditors.
What Does a Bankruptcy Trustee Do?
The trustee’s job is to liquidate any unprotected assets you may own and pay the proceeds to your creditors. This might include your house, but only if you have more equity than your homestead exemption.
How the Homestead Exemption Applies During Bankruptcy
Let us assume that you file a Chapter 7 bankruptcy and that your house is worth $500,000 with a $350,000 mortgage. In this scenario, a bankruptcy trustee will not try to sell your home because the equity in your home is less than your homestead exemption of $250,000.
Here is how the math works:
If you were to sell your house for $500,000, you should expect to pay about $40,000 (8 percent of the sale price) in realtor fees and closing costs. After paying off the mortgage, you would receive $110,000 from the sale. This is less than the homestead exemption, so the bankruptcy trustee would leave your house alone.
Let’s consider a scenario in which your house is worth more. Let’s say you can sell your house for $800,000. You have $350,000 remaining on the mortgage. After closing costs and fees and paying off the mortgage, the net from the sale of the house would be $386,000.
You would receive $250,000 of that because that is the maximum amount allowed under the homestead exemption. The remainder of the proceeds would go to pay your creditors.
Keeping Your House in Chapter 13 Bankruptcy
If you are behind on mortgage payments and are facing foreclosure, you might consider filing a Chapter 13 bankruptcy. Chapter 13 allows you to create a repayment plan to catch up your past due mortgage payments over several years, and can be used to prevent foreclosure.
How Chapter 13 Bankruptcy Works
When you file Chapter 13, you propose a payment plan to pay back a portion of your debts. The plan lasts between three and five years, and the payments are often determined by your disposable income.
If you will be catching up on past due mortgage payments – also known as arrears – you will need to include the total amount of arrears in the Chapter 13 plan. You will also be required to start making the regular mortgage payment to the bank going forward.
Is Chapter 13 Bankruptcy Right for Me?
Chapter 13 can be a useful tool for those who can afford their mortgage payments going forward, but have too many missed payments to be able to catch up.
Other Benefits of Chapter 13
Get Rid of a Second Mortgage
Another advantage of Chapter 13 is that it allows you to strip off a second mortgage. As long as your property is worth less than the first mortgage, you can file a motion with the bankruptcy court to remove the second mortgage.
If the value of your property is in question, you may need to get an appraisal to determine if a second mortgage strip-off is possible. This is a particularly valuable aspect of Chapter 13 since it potentially allows you to gain equity in your property as the real estate market improves.
Removing Judgment Liens in Bankruptcy
Why Do I Have a Judgment Lien on My House?
If a credit card company or other collector sues you and obtains a judgment against you that creditor will often record the judgment in the county records of the county where you live. When a judgment is recorded in the county records, it attaches as a lien on any real estate you own in that county. This is often referred to as a judgment lien or judicial lien.
The problem with judgment liens is that, like mortgages, they must be paid before you can sell or refinance your house. Fortunately, judgment liens can be removed in both Chapter 7 and Chapter 13 bankruptcies.
How to Get a Judgment Lien Removed
It is important to remember that judgment liens are not removed automatically by a bankruptcy filing. Your bankruptcy attorney will need to file a motion with the bankruptcy court for each judgment lien that you want to have removed.
If you have previously filed bankruptcy but did not file the necessary motions, you may still have judgment liens attached to your property. If this is the case, you may need to contact our firm to discuss reopening your bankruptcy.
Find Out if Bankruptcy is Right for You
If you’re wondering which avenue you should take to get your debt under control, consider talking with an experienced attorney. Bankruptcy may be the option for you, but it’s possible there are other outlets you could take to reign in the debt. Call 303-688-0944 to begin your case assessment.