Many people have reservations about Chapter 7 bankruptcy because of the fear of losing all their assets, including their homes and cars. This presumption exists because in a Chapter 7 bankruptcy, your assets are liquidated in order to settle your debts. During the process, you will have to provide your trustee with a list of your assets and they will take charge of liquidating them to pay off your creditors.
So people have a long-standing fear of losing the valuable things they own, especially the homes they worked so hard to buy for their families. But if you’ve had this reservation, here’s some good news. Filing for a Chapter 7 bankruptcy in Colorado does not automatically mean that you lose your home.
A Chapter 7 bankruptcy exists for the purpose of helping debtors create a clean clean slate, with all their debts eliminated. It’s a legal declaration of bankruptcy and often chosen by debtors because it is quick and simple.
The liquidation part of it might be alarming, but the process has measures in place to keep it fair, meaning that you can still protect most of your valuable assets, including your car and your home. A Chapter 7 bankruptcy is subject to the Colorado homestead exemption. Speaking with a bankruptcy attorney in Denver can help guide you through this process.
What is the Homestead Exemption?
The homestead exemption exists as a protective measure for bankruptcy clients. It helps you protect the equity that you have in your home. As of January 2021 in Colorado, there is a new law in place that increases the amount of equity a bankruptcy client can exempt.
AB 1885 changed the homestead exemption amount under the Code of Civil Procedure, section 704.730. From allowing bankruptcy clients to exempt a maximum of $150,000 of equity in their homes, the new law drastically increased the possible exemption amount to $300,000 or the country-wide median sales price of a home. In effect, a bankruptcy client can now exempt up to $600,000, depending on the median average sales price in their county.
When Does the Homestead Exemption Apply?
The homestead exemption applies to real property that you use as your primary residence, including your house, condominium, mobile homes, or house trailers. The only important thing to note is that you must occupy the property in order to qualify for the homestead exemption. The exemption also applies to sale proceeds two years after you receive them.
What Do You Need to Do to Claim the Homestead Exemption?
The homestead exemption is usually applied automatically in Colorado, which means that there are no actions you need to take to claim it. No petition or declaration is required. But there can be instances when you will need to make a homestead declaration, particularly when it comes to order declarations incurred before July 1, 1975.
Although there is a homestead exemption in place that increases the chances of you keeping your home, there are other considerations that need to be made.
- Do you want to keep your house?
While many bankruptcy clients prioritize keeping their homes, others may be too far behind on payments and no longer want to continue. If you’re behind on your mortgage and you’ve accrued interest rates that are too high, it might be a wiser decision to let go of your home in bankruptcy and allow liquidation to settle your debts.
- Are you current on your payments?
Another thing to consider is if you are current on your mortgage payments or not. If you are behind on your mortgage, the creditor has the capacity to ask the court to start the foreclosure process to sell your home. This can put you in a difficult position to retrieve it.
- Do you have equity?
If you have equity in your home and Colorado’s state exemption protects it, you are in a better place to be able to keep your home — again going back to the homestead exemption. If, however, your equity is not exempted, your trustee may advise that your home be liquidated to settle your debts.
A Chapter 7 bankruptcy is the quickest and easiest way to get most of your debt discharged and get you back on track financially. There are measures in place to help you protect your valuable assets as long as you know what your rights are and what you can do. It’s always helpful to speak to an attorney who knows the law’s ins and outs and can help advise you on the steps to take to keep your home.