High Home Values and Filing Bankruptcy in Colorado

It’s fairly well known that the population of Colorado has significantly increased over the past few years. With the rising population, the Law Office of David M. Serafin has seen residential real estate prices balloon especially in the Denver metro area. (Of course, the price of housing is generally higher nationwide due to low interest rates, low unemployment and a strong economy as of 2019 but real estate in Colorado has especially soared in value.) Now, it seems, everybody has equity in their house unlike when I first started filing personal and business Bankruptcy cases during the recession well over a decade ago. This house equity still can and should be protected in either a Chapter 7 or Chapter 13 Bankruptcy.

The current Colorado Homestead Exemption allows for the protection of the first $75,000 of equity in a primary residence (that you live in on the Bankruptcy Petition date – second homes or rental properties are not exempted). Anybody elderly (age 60 or older) or legally disabled is entitled a higher exemption protecting the first $105,000 of home equity.

So, for non-elderly Bankruptcy filers, the equity in your house would be fully protected from a Bankruptcy trustee (court appointed as a fiduciary to represent the best interests of the unsecured creditors) in Chapter 7 – as long as monthly mortgage payments remain fully current – if, for instance, the house is worth $400,000 and the mortgage payoff is $325,000. The house would be fully protected even if the equity slightly exceeds $75,000 as hypothetical realtor costs (of 3% to 8%) are factored into the liquidation analysis. In this particular example, the house value could actually be as high as $412,000 to $432,000 and still be protected under the Colorado Homestead Exemption.

If the numbers are close, I will request a realtor Comparative Market Analysis (CMA) – and not a cursory online valuation which doesn’t consider the internal condition of the house and which typically provides inflated numbers - from a local realtor so that we can better corroborate value for the trustee and Colorado Bankruptcy Court.

If the house equity well exceeds the Colorado Homestead Exemption or if trying to protect a non-exempt rental or commercial property, Chapter 13 Bankruptcy will protect it from a trustee and creditors. Conversely, a Chapter 7 filed to protect a house with too much value can prove ultimately catastrophic. Chapter 13 involves repayment of anywhere from a small portion to the entirely of the unsecured debt. Any surplus equity (above the exemption and with any realtor or other transaction costs factored in) can be paid back as part of a regular monthly Plan payment for three (3) to five (5) years to a Chapter 13 Trustee. This is legally referred to as the Best Interest of Creditors test. Using the above example, consider if the house to be protected is now worth $450,000. The calculation would be as follows: $450,000 minus 8% for realtor fees = $414,000 minus the $325,000 mortgage payoff = $89,000 in equity minus the $75,000 homestead exemption = at least $14,000 required to be paid to unsecured creditors to obtain a successful Chapter 13 reorganization and discharge. Note that the house value isn’t the only determinant of what the Chapter 13 Plan payment would be. In this example, over $14,000 would be required to be paid back to unsecured creditors if the Bankruptcy debtor’s monthly disposable income as determined by the Means Test, and in relation to household size and necessary monthly expenses, is high enough to justify additional repayment.

As an experienced Bankruptcy lawyer, my utmost job is providing a legal route through the Bankruptcy Code to pay back as little to unsecured creditors as possible whether in a Chapter 7 liquidation or in a Chapter 13 reorganization (and also at a zero or greatly reduced interest rate).

The highly priced housing market in Denver and other areas of Colorado also affect rentals for Bankruptcy filers. Rental housing which was $1,200 per month five years ago might now be $1,800 per month for the same property thereby tightening the budget. But, unlike with owning a house where any equity needs to be accounted for and protected, the silver lining of a higher housing expense (so long as the expenses is reasonable – $4,000 per month in rent for a single person in downtown Denver won’t cut it) can mean either passing the Chapter 7 Means Test and receiving a quick discharge or reducing the net disposable income paid monthly through a Chapter 13 Trustee for the benefit of unsecured creditors.

I mentioned earlier the precondition that regular mortgage payments should remain current at all times - Bankruptcy or otherwise. While any arrears stemming from delinquent house payments incurred before Bankruptcy can be cured interest free (all the while staying the foreclosure process) in Chapter 13, mortgage payments missed after the Bankruptcy filing can give rise to a Motion for Relief from Automatic Stay filed by the mortgage servicer or bank in order to proceed or re-commence any foreclosure sale.

The bottom line is that, even in a strong local housing market, the Law Office of David M. Serafin (with offices in Denver and Summit County) will give you top notch legal advice tailored to your individual legal situation in order to protect your Colorado home in either Chapter 7 or Chapter 13 Bankruptcy.

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