Surplus Foreclosure Funds Due Owner Exempt Under Colorado Homestead

In the rare event (in this depressed housing market) that a foreclosure sale yields surplus funds beyond that needed to satisfy the mortgage, the prior homeowner receives those funds; those funds are protected from other creditors and the bankruptcy trustee under Colorado’s Homestead exemption.

May 10, 2011, Colorado Bankruptcy Court judge B. Campbell issued the opinion in Case 10-31663-ABC, In Re Elliot. At the time debtor filed his chapter 7 bankruptcy petition, he had $35,957.68 in his checking account and listed those funds as exempt under Colorado’s homestead exemption since the funds were the surplus resulting from the foreclosure of his primary residence.

Colorado has long allowed the Homestead exemption to protect the proceeds from the sale of real estate, but the statute only specifically mentions “sale by owner” or by an execution creditor (CO Rev. Stat 38-41-207). The statute is silent on the status of a foreclosure sale conducted by a public trustee. Normally, to maintain the homestead exemption for funds received from a sale, the debtor must place the funds in a segregated account. If you comingle the homestead funds with other money (e.g. wages, savings etc) the homestead funds may lose its exempt status. Also, the proceeds are only exempt up to 2 years.

Although Colorado’s Homestead Exemption does not expressly contemplate proceeds of a foreclosure sale, Judge Cambell fell back on the fact that exemption laws are to be liberally construed to favor the debtor. As a result, if a homeowner is due money from a foreclosure sale of her primary residence and properly segregates those funds, those proceeds are exempt under Colorado’s Homestead exemption (so says Judge Campbell).