If you are struggling with debt and considering bankruptcy in Colorado, you may be wondering what to do with your home. One common question is whether you can sell your house before filing for bankruptcy. In many situations, the answer is yes. However, selling real estate shortly before a bankruptcy filing can create important legal and financial issues that should be carefully considered.

The timing of the sale, the amount of equity in the property, how much you receive from the transaction, and what happens to the sale proceeds can all affect a future bankruptcy case. Before selling a home when bankruptcy may be on the horizon, speaking with a Colorado bankruptcy attorney can help you understand the potential consequences.

Can You Legally Sell a House Before Bankruptcy in Colorado?

Generally, you are allowed to sell property before filing for bankruptcy. Filing for bankruptcy does not require you to keep your home until the case begins.

However, the sale should be a legitimate transaction conducted for fair market value. Once you file for bankruptcy, you will generally be required to disclose recent transfers and financial transactions as part of your bankruptcy paperwork.

A bankruptcy trustee may examine transactions that occurred before your filing. A sale that appears designed to conceal assets, transfer property for less than its reasonable value, or prevent creditors from reaching assets can lead to serious complications.

Why the Sale Price Matters

If you decide to sell your Colorado home before bankruptcy, receiving fair market value is important.

For example, selling a house worth $400,000 to a relative for $100,000 shortly before bankruptcy could attract scrutiny. The trustee may investigate whether the transaction improperly reduced assets that otherwise could have been available in the bankruptcy estate.

An ordinary arm's-length sale at a reasonable market price is different, but the proceeds from that sale may still become important when determining what assets must be disclosed and whether they are protected.

What Happens to the Money From the Sale?

Selling the house does not necessarily remove its value from consideration in bankruptcy. Instead of owning equity in real property, you may now possess cash or money in a bank account.

How those proceeds are treated can depend on the facts of the case and the exemptions available to you. Colorado's homestead exemption may protect qualifying equity in a residence up to applicable statutory limits, but whether protection extends to proceeds after a sale depends on Colorado law and the circumstances surrounding the transaction.

Because exemption laws and dollar amounts can change, homeowners should obtain current legal guidance before relying on a particular exemption.

Colorado Homestead Exemptions and Bankruptcy

Colorado exemption laws can play an important role when deciding whether to sell your home before bankruptcy.

A homestead exemption is designed to protect a certain amount of qualifying home equity from creditors. Whether you can protect all of your equity depends on factors such as your property's value, mortgage balances, other liens, your circumstances, and applicable Colorado exemption limits.

Selling the property before bankruptcy can change the type of asset you own, making careful planning particularly important.

Should You Sell Before Filing Chapter 7 Bankruptcy?

In a Chapter 7 bankruptcy, a bankruptcy trustee reviews the debtor's assets to determine whether there is nonexempt property that may be administered for the benefit of creditors.

If your Colorado home contains substantial equity beyond the amount protected by applicable exemptions, selling it before filing does not automatically solve the issue. The proceeds may still need to be disclosed and could potentially be available to creditors if they are not protected.

A Colorado bankruptcy lawyer can review your home's equity and other assets before you decide whether selling is appropriate.

Selling a House Before Chapter 13 Bankruptcy

Chapter 13 works differently from Chapter 7. Rather than generally involving liquidation of nonexempt assets, Chapter 13 typically allows qualifying individuals to reorganize their debts through a court-approved repayment plan.

Home equity and proceeds from a recent property sale can still affect the bankruptcy analysis and potentially influence the repayment plan. If keeping or selling your house is part of your financial strategy, it can be helpful to evaluate that decision before filing the case.

Avoid Transferring Your House to Friends or Family

Transferring a house to a friend or family member shortly before bankruptcy is very different from completing a legitimate sale at fair market value.

Bankruptcy paperwork requires extensive financial disclosure, and trustees can review transactions made before a case was filed.

Attempting to hide property or move assets outside the reach of creditors may have significant consequences, including challenges to a bankruptcy discharge.

If you have already transferred, gifted, or sold real estate to someone you know, tell your bankruptcy attorney about the transaction before filing.

Should You Pay Creditors With the Sale Proceeds?

Using proceeds from the sale of a home to pay debts before bankruptcy may seem reasonable, but the decision requires caution.

Certain payments made before bankruptcy can receive additional scrutiny. For example, paying one creditor while leaving others unpaid may raise questions under bankruptcy rules concerning preferential payments. Transactions involving relatives, business partners, or other insiders can require particular attention.

Before distributing substantial proceeds to creditors, consider discussing your proposed payments with a bankruptcy attorney.

Keep Detailed Records of the Home Sale

If you sell your Colorado house and later file bankruptcy, keep thorough documentation relating to the transaction. Helpful records may include:

• The purchase and sale agreement
• Property appraisals or comparable market information
• Mortgage payoff statements
• Closing disclosures and settlement documents
• Real estate commissions and closing expenses
• Bank statements showing where the proceeds were deposited
• Records showing how the proceeds were subsequently used

Accurate records can make it easier to explain the transaction and properly complete your bankruptcy disclosures.

Talk to a Colorado Bankruptcy Attorney Before Selling Your Home

Selling a house before bankruptcy is possible, but the order in which you make major financial decisions can significantly affect your options. Ideally, homeowners should understand how a proposed sale could affect exemptions, available assets, Chapter 7 eligibility considerations, or a Chapter 13 repayment plan before completing the transaction.

At Law Offices of Andrew F. McKenna, P.C., we provide legal assistance to individuals throughout Colorado who are considering bankruptcy. We can help you evaluate your financial circumstances, understand how Colorado bankruptcy laws may apply to your home, and consider your options before making significant decisions involving your property.

If you are thinking about selling your house before filing bankruptcy in Colorado, consider discussing your circumstances with Law Offices of Andrew F. McKenna, P.C. before moving forward.