The concept of "homestead exemption" is an American invention that dates back to a statute adopted by the Republic of Texas in 1839. Colorado's first homestead exemption statute was passed in 1868, and pre-dates its statehood. When the Colorado Constitution was enacted a few years later, it guaranteed the right to a homestead exemption of some kind. So, what is a homestead exemption and what is it good for?
The basic purpose of the Colorado homestead exemption (not to be confused with the federal Homestead Acts, which pertain to land patents) is to help a person protect his home against creditors. A homestead exemption takes effect automatically when a person occupies his house, farm or mobile home as a primary residence. While a filing is not necessary to create a homestead, a person may file a document in the public records claiming a homestead with respect to certain property. The filing has special consequences that should be considered carefully.
Generally speaking, once a person establishes a homestead, a creditor cannot pursue the property to satisfy the person's debt unless:
• The debt exceeds the amount of the homestead exemption added together with existing liens against the property;
• The debtor has agreed to waive the homestead exemption with respect to the creditor (such waivers often appear in deeds of trust);
• The debtor abandons the property (thus terminating the exemption); or
• The debt in question was a loan used to purchase the property (or a refinance of that loan).
The current Colorado exemption amount is $60,000 for a non-elderly or disabled person and $90,000 for an elderly or disabled person. For purposes of the statute, the term "elderly" means 60 years of age or older.
The way homestead exemptions work is perhaps best explained by giving a few examples. Assume a person is not disabled or elderly and claims a homestead exemption in her home (which has no other liens); a creditor gets a judgment against her for $40,000. The creditor would not be able to collect the judgment against the home because the claim is less than the homestead exemption of $60,000. Now assume the same facts except the judgment is for $70,000. The creditor may be able to collect $10,000 against the home (but not the full $70,000). Now assume a $70,000 debt and the person is elderly at the time of the foreclosure. The creditor would not be able to collect against the home because the debt is less than the homestead exemption of $90,000. Now assume there are existing liens. The creditor would only be able to collect if the claim exceeds the amount of the exemption and the liens.
Creditors with claims exceeding the amount of existing liens and the homestead exemption must follow a special procedure to foreclose a property. They must provide the sheriff or public trustee (whichever will conduct the foreclosure sale) with their own affidavit, and an affidavit from a qualified appraiser, showing, among other things, that the fair market value of the property is more than the amount of existing liens and the homestead exemption. Failure to file the affidavits renders any foreclosure void. At the foreclosure sale, if the highest bid does not exceed 70 percent of the fair market value shown in the affidavits, the foreclosure is terminated and the creditor is liable for costs of the sale and cannot again attempt to collect the same debt against the property. If the bid is sufficient, the money is used first to pay senior liens; then to pay the homestead exemption to the owner; then to pay the costs of the sale; and finally to pay the creditor. This is a different distribution of money from a typical foreclosure.
There are many intricacies of the law relating to homestead exemptions that could not be discussed here. Consult an attorney for advice about your particular situation.
Noah Klug is principal of The Klug Law Firm, LLC, a general law practice in Summit County emphasizing real estate and business law. He may be reached at (970) 468-4953 or Noah@TheKlugLawFirm.com.