Jerry Kopel


Your home is your castle, right? Well, it could depend on where your castle is located, unless the U.S. Senate wins its fight with the U.S. House over a revised bankruptcy law.

The bill will greatly restrict the ability of non-business debtors to file for bankruptcy and force many into doing a repayment plan called Chapter 13. But the House and Senate versions are in conflict and headed for a conference committee.

One conflict is "how to handle a homestead exemption". The House would let each state decide its homestead exemption. The Senate would allow no homestead exemption greater than $100,000. An "exemption" means that in a bankruptcy, creditors can't reach any dollar equity in a homestead (home) except the portion that is larger than the exemption.

Colorado debtors would "love" a $100,000 homestead exemption. The present law (HB 1233) which I sponsored in 1991, raised the state homestead exemption from $20,000 to $30,000. And the $20,000 figure came into law in 1981 in a bill by Sen. Sam Zakhem which raised the number from $7,500 enacted in 1973, which in turn raised the number from the previous $5,000.

Here is the language in CRS 38-41-201. "Every homestead in the state of Colorado occupied as a home by the owner thereof or his family shall be exempt from execution and attachment arising from any debt, contract, or civil obligation not exceeding in value the sum of thirty thousand dollars in actual cash value in excess of any liens or encumbrances on the homesteaded property in existence at the time of any levy of execution thereon."

Of course the Colorado numbers violate the state constitution. Article 18 begins with Section 1. "The general assembly shall pass liberal homestead and exemption laws". The key words are "shall" and "liberal", neither of which need further explanation.

However, it might as well read "The general assembly shall pass, if it feels like it..." (Or can a court hold the state liable for money damages to Colorado citizens denied the right to claim liberal homestead and exemption amounts in lawsuits or bankruptcy?")

The language that keeps appearing in bankruptcy decisions is that bankruptcy is designed to give the honest but unfortunate debtor a fresh start in life with a clear field for future effort, without the pressure and discouragement of preexisting debt.

The U.S. Constitution doesn't touch the subject of homestead laws, but Section 8 (4) gives Congress power to establish "uniform laws on the subject of bankruptcy throughout the United States".

The fight in Congress is over how much equity should a homestead exemption allow. It results from decisions in some states (such as Florida and Texas) to allow residents to file bankruptcy and still keep the equity in the home no matter what the amount ($5 million, $10 million, $100 million). This is sort of a reverse approach to bringing "business" into a state through tax-free "enterprise zones".

Many wealthy bankrupts-to-be have left Colorado in the past, moved to a "no homestead limit" state, established residence (it only takes three months and one day under federal law) poured vast sums into a home or ranch, and then filed bankruptcy, keeping large sums out of the hands of creditors.

Of course, most ordinary consumer bankrupts usually add a second or third mortgage to their homes, and try to stave off bankruptcy. When they fail, there isn't ANY equity left.

There are other exemptions for both bankruptcy and non-bankruptcy debtors in CRS 13-54-102. While not shown in the footnotes under section 102, much of the enumerated personal property in the present statute can be traced back to laws beginning in 1861 and most of it hasn't been changed since 1981 or kept up with inflation. Examples:

Farmers' animals and tools: In 1883: $250. In 1998: $2,000.

Library of professional person: In 1883: $300. In 1998: $1,500. Tools of Trade: In 1883: $200. In 1998: $1,500.

If anyone believes an 1861, 1883, or even a 1901 dollar only equals five, seven, or eight 1998 dollars, I have a genuine gold bar I'd like to sell you.

Passing the 1981 law was a mistake, and I take some responsibility as a co-sponsor. The 1981 trade off was that Colorado would give up the right to use exemptions provided by federal law (CRS 13-54-107) with the understanding that the legislature would continue to increase dollar amounts on specific items of exemption, based on the consumer price index. It was a sort of state's rights issue by which the sponsors counted on a legislature to act in a responsible fashion. Dumb!

We then discovered that the Colorado Retail Council and various money lenders made SURE it didn't happen.

If personal property is secured by a creditor, the creditor gets the property. Any exemption only applies to equity above the debt. But if bankruptcy is to provide the debtor with a fresh start, of what value is "one or more motor vehicles kept and used by any debtor for the purpose of carrying on any gainful occupation in the aggregate value of one thousand dollars"? That's the present law in Colorado, CRS 13-54-102 (j) (I).

Studies show one third of consumer bankruptcy debt is created by credit cards, and much of the remainder by uninsured hospital and medical bills.

Presently, 13 sections of the exemption law have not been revised as to dollar amounts since 1981...18 years before the 1999 legislative session. They should either be revised, or CRS 13-54-107 which denies Colorado citizens the right to use federal exemptions should be repealed.

It's a good issue for 1999. There are more bankrupt debtors who VOTE, than there are unsecured money lenders. According to Scripps Howard News Service, "a record 1.35 million people filed for bankruptcy protection" nationally in the fiscal year ending June 30, 1998. A lot of them live in Colorado.


Jerry Kopel writes a column for the Statesman based on 22 years past experience as a state legislator.

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