What does Colorado’s new homestead exemption mean for your legal case?

On April 7th, Governor Polis signed Senate Bill 86 into law, drastically increasing Colorado’s homestead exemption to $250,000 for most individuals and $350,000 for older and disabled Coloradoans, in addition to broadening what constitutes a homestead in Colorado, granting using cars, trailers, RVs, tents, and other non-traditional residences as home exemptions for those dwellings. The bill also created a number of new exemptions for various forms of personal property, including exemptions for: 

• $2,500 of cash held in bank accounts;
• Firearms, hunting and fishing equipment;
• Economic impact payments;
• Health savings accounts; and
• Cash held in life expectancy set-aside accounts or similar reserve fund, escrow or impound account,

You may be wondering: what does that mean for Coloradoans? What is the homestead exemption? How do I take advantage of it? Am I considered “elderly or disabled”? 

The homestead exemption is a legal statute that shields a certain amount of equity — in the case of Colorado’s new law, between $250,000 and $350,000 — from certain creditors following the death of a homeowner’s spouse or a declaration of bankruptcy by the homeowner. For example, if your primary residence is worth $600,000 and the balance of your mortgage and other secured debts against the property is $450,000, the new Colorado homestead exemption would protect all $150,000 of equity in your home in the event a creditor was awarded a judgment against you and came to collect. Additionally, unlike many other states, Colorado’s homestead exemption is automatic, meaning you do not have to file a declaration or paperwork to benefit. If your equity in your home exceeds the homestead exemption — for instance if your home is worth $600,000 and you have no mortgage on it, meaning you have $600,000 of equity — a creditor can force a sale of your home to collect a debt, but can only take the non-exempt portion of equity (in this example, that would be $350,000 if the homeowner was not elderly or disabled, or $250,000 if he or she was). 

The idea behind the homestead exemption is to protect an individual’s access to shelter and core financial assets: the primary residence. However, the protection the homestead exemption affords does not apply to your mortgage lender or other secured creditors, meaning if you pledged your home for a debt and default on your loan agreements, a lender can still foreclose.

The other exempt assets created or increased in amount by Senate Bill 86 work similarly — a creditor cannot access exempt assets to satisfy a judgment or debt. 

What does this mean for creditors, debtors, and those either involved in or contemplating a lawsuit? In short, it got a whole lot harder for creditors to collect on a debt from individuals without assets beyond the typical primary residence, retirement accounts (which were already exempt under Colorado law), and small amounts in bank accounts. Debtors and potential debtors, with the help of counsel, now have new tools and leverage in negotiating, settling, and defending lawsuits against creditors or potential creditors, and will have some peace of mind that, financially, the worst case scenario just got more manageable. Our litigation team of John Gaddis, Jeff Rose, Erin Pierce, Chad Kupper and others can help you use the new leverage to get a better result in your case. 

On the other side of the courtroom, creditors will have to assess the wisdom of bringing or maintaining a lawsuit, and those in the middle of a lawsuit to obtain a judgment they assumed would be collectible may face a setback. Potential creditors will want guidance and advice from counsel regarding initial due diligence on a potential debtor’s assets and whether a lawsuit will be worthwhile, as well as advice on how to negotiate settlements given the new exemption environment.