Many states protect homeowners from losing their primary residences in case of bankruptcy, an exemption known as the Homestead Law. In Colorado, the Homestead Law allows you to exempt up to $60,000 of the value of your home when filing for bankruptcy, but only if you have equity in the home.
Equity and the Exemption
The homestead exemption applies to your equity, which is the difference between the value of the house and what you owe on the mortgage. For example, if your house is worth $120,000 and you still owe $60,000 on the mortgage, you have $60,000 worth of equity. If your house is worth $75,000 and you still owe $50,000 on the mortgage, you have $25,000 worth of equity.
In both these situations, your equity would be exempt under Colorado bankruptcy law. If your equity is above $60,000, however, you can't claim all of it. For example, if your house is worth $150,000 and you only owe $25,000 on the mortgage, you have $125,000 worth of equity, but only $60,000 of this equity would be exempt.
Protecting Your Home
The equity in your home is considered an asset. In a Chapter 7 bankruptcy case, all non-exempt assets can be liquidated or sold off to discharge your debts. If your equity is equal to or less than the Colorado exemption, your house won't be sold off to pay your debts because none of that money is available to pay off creditors.
If your equity is greater than the exemption amount, then your house could be sold off to pay your creditors. You would still receive all the equity to which you're entitled under Colorado law, but you won't be able to keep the house. Instead, the bankruptcy trustee will give you a check for your exempt equity.
In a Chapter 13 bankruptcy case, you may be able to keep your home if you pay the non-exempt portion of the home's value to your creditors.
Limitations and Exceptions
Your exemption increases to $90,000 if you, your spouse or your dependent are over 60 years old or disabled. Unlike some other states, Colorado does not allow married couples to double their homestead exemption or use the federal homestead exemption.
To qualify for the homestead exemption, you have to be living on the exempt property. The only exception is if you have already sold it, in which case the exemption applies to the sales proceeds for two years. Under federal law, you cannot claim a homestead exemption in any state until you have been a homeowner there for at least 40 months.
If you are behind on your payments, or a lien is attached to the property, the Homestead Law does not apply and your creditors will still be able to take your home. Under Colorado foreclosure law, a loan is considered delinquent one day after the payment due date and goes into default after 30 days. If your loan is in default, the bank can start foreclosure proceedings at any time if you have a conventional loan. This is the case even if you've only missed one payment. If you have a loan from the Federal Housing Administration, the foreclosure process doesn't start until you miss three payments.
If this happens, you might be able to stop the process by filing a form with the county's public trustee office at least 15 days ahead of the auction, announcing your intent to get caught up. If you file this "intent to cure" form, the trustee will let you know how much you need to pay to prevent foreclosure. However, the Homestead Law offers no protection in this situation.