For Colorado citizens struggling with debt and considering bankruptcy, concerns about their home may be the most significant factor holding them back from filing. There is a common misconception that anyone who filed bankruptcy must liquidate all of their assets in doing so. However, this is simply not the case.
It is possible to protect some of your assets which the state considers exempt from liquidation in bankruptcy. How much value in your home you can protect depends on the kind of bankruptcy you file. In Chapter 13 bankruptcy, there is no limit to the amount of equity that you can potentially exempt. For those who qualify for Chapter 7 bankruptcy, there is a state limit.
Colorado law allows you to protect a significant amount of equity in your home
Although there are federal standards for bankruptcy exemptions, each state has the right to set their own limits as well. Colorado has relatively generous exemptions for homeowners facing bankruptcy. If you must file Chapter 7 bankruptcy to liquidate your non-secured debts, you can protect significant value in your home under Colorado Revised Statute § 38-41-201.
For the average person, the amount of equity you can exempt from liquidation in a Chapter 7 bankruptcy is $75,000. If the person filing bankruptcy is elderly, disabled, or the elderly or disabled spouse or dependent of the owner, the amount increases to $150,000.
What happens to excess equity in a Chapter 7 bankruptcy?
Equity refers to the amount of the principal value of your mortgage that you have paid off over time. It is not simply the sum of each month’s mortgage payment, but the amount that goes to the principal rather than interest.
Any amount that you’ve accrued above the exemption level may end up liquidated by the courts. In these situations, you will likely have to refinance and withdraw the excess equity to repay creditors. Provided that your equity is below the exemption level, you will not need to worry about doing that.
Bankruptcy can help you stay in your home by simplifying your finances
One of the reasons that people file for bankruptcy is a consistent struggle with making payments on a mortgage. If you have a high level of unsecured debt, whether it is credit card debt or medical debt, you may not have enough money to make all of your monthly payments.
In that situation, your mortgage could become a major source of stress. Chapter 7 bankruptcy allows you to discharge those debts, freeing up more of your limited monthly income to pay for your mortgage and other necessities. If you are worried about your ability to pay your bills and stay in your home, Chapter 7 bankruptcy may offer the kind of debt relief that provides you with a fresh start.