There are always topics in bankruptcy law to complain about, especially exemption amounts and allowed exemptions. I find two exemptions in particular most aggravating and unfair for consumers. I cover the first and most common here.
Homestead Exemptions Should Be Available To Both Debtors
First a quick primer on the current state of the homestead exemption. . The Colorado Legislature enacted the homestead exemption for bankruptcy and other debt related levies in CRS 38-41-201 through 206. Some nuances apply, for instance Section 38-41-201.5 clarifies that mobile homes are entitled to a homestead exemption. But here are the basics.
Colorado residents are entitled to an exemption of $75,000 for a home that they own and occupy. If the home owner or the owner’s spouse or dependent who also lives in the house is at least 60 years old or disabled, then the exemption amount rises to $105,000.
Those amounts seem about right to me, especially since the Legislature just raised them in 2015. The problem with the homestead exemption comes into play when a married couple files a joint petition. They are each entitled to take the full exemption on all allowable and applicable property except the homestead.
Let’s take another high-cost item as an example. Many couples own two cars, one for each to drive. Sometimes one is paid off and the other has a loan on it. Suppose a couple owns a truck that is paid off and worth $12,000 and a sedan that is worth $16,000 but has a $18,000 loan on it. The vehicle exemption of $7,500 will not cover the truck, so the trustee would be able to sell the truck and recover $4,500 for creditors. Except that Colorado allows the couple to each take a $7,500 exemption. That gives them a total of $15,000 in vehicle exemptions, well over what they need to completely shield the truck from the trustee. They don’t need any exemption on the sedan because it’s under water.
So if the dual-individual exemption is okay for a vehicle, why not for a home? Colorado courts (in a 1981 case called In re Howe and a 1983 case called In re Pruitt) say the double exemption is not okay for a home because of how the common law treatments joint tenancies, actions in rem and the legal effects of creating a bankruptcy estate. Real nerd lawyer stuff, and probably correct analysis of the state of the law. That doesn’t mean it’s the right policy for today.
Bankruptcy exemptions are generally treated like a personal right in today’s bankruptcy and debt collection cases. This holds true through every exemption allowed in Colorado, except the homestead exemption. There is ample precedent for this policy. The federal exemptions (which Colorado petitioners may not claim) allow a dual-individual homestead exemption. Many other states also allow their residents in a joint bankruptcy to each claim a homestead exemption, so Colorado would hardly be blazing new ground here.
Ultimately, bankruptcy was specifically provided for in the US Constitution because the founders recognized the tremendous tyrannical power of economic hopelessness. In our practice, more than one couple has decided to forego the fresh start offered by the bankruptcy code because it meant they would lose their home. A dual-individual homestead exemption would have enabled them to change their lives for the better. It’s time for the Colorado legislature to speak on this issue that has been so far dominated by judicial interpretation. Pass legislation to all a dual-individual homestead exemption.
I use the term ‘dual-individual exemption’ instead of ‘double exemption’ here because I think it more properly conveys the concept. This isn’t doubling anything, Current law actually cuts the available exemption in half. I simply advocate restoring the full exemption to both individuals in a joint filing.