How Arizona’s Homestead Laws Affect Your Residence
Changes to Arizona’s laws regarding the homestead exemption and creditors’ rights have recently gone into effect giving judgment creditors further ability to collect against a debtor-homeowner. As a counterbalance, homeowners were given a larger equity cushion safe from the attachment of money judgments; that amount was raised from $150,000 to $250,000.
The homestead exemption protects individuals’ equity in their home from judgment creditors. A homestead is defined as a “person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides.” A.R.S. § 33-1101(A)(1). In simpler terms, it is the condo, townhome, or single-family home you own and where you spend most of your time. Historically, the word “homestead” derives from the homestead acts enacted during and after the Civil War, which were intended to motivate the settlement of the western states and territories. While those homestead acts are no longer in place (we believe the last of them expired in the mid-1930’s), the word “homestead” and the phrase “homestead acts” have survived, in a somewhat different context and purpose.
Arizona enacted its homestead laws presumably based on the public policy of sheltering its residents from homelessness. If a judgment creditor forces a foreclosure on the debtor-homeowner, the statute would protect a down payment to be used on the debtor’s next residence. The amount the statute protects has grown over time; as of January 1, 2022, it increased to $250,000. While homeowners have more equity secured, creditors rights have been expanded in a significant way.
Judgment creditors now have the right to lien homestead property. Judgment creditors commonly arise in the context of outstanding credit card debt, loans, medical bills, etc. Prior to the recent changes, judgment creditors who obtained a judgment and properly recorded it in the counties where the debtor owns real property, enjoyed a lien upon all real property owned by the debtor or acquired thereafter in those counties, except the debtor’s residence (this is in contrast with mortgage lenders, who have always enjoyed the right to lien a residence under mortgage laws and to whom the homestead exemption does not apply). Until now, a judgment creditors’ only ability to collect on a debtor’s residence was through a sheriff’s sale, a somewhat difficult process. The recent changes allow a judgment creditor to maintain a passive lien on a residence or to proceed with a foreclosure sale (which has always been true for mortgage lenders). The statute applies to all properly-recorded money judgments, whether prior to, or after, January 1, 2022. In effect, money judgments are now a valid lien on an individual’s residence.
You might wonder how this affects the average Arizonan homeowner. Unlike some pieces of legislation, whose effects might not be apparent, homeowners may experience:
1. Title companies ensuring judgment creditors can be paid out of escrow proceeds, if any. For example, selling or refinancing a home usually require the services of a title company. If a money judgment clouds the title of a residence, the title company will not “insure over” the defect, usually resulting in the mortgage lender or buyer walking away from the deal. Judgment debtors should expect to see a payoff for a money judgment on the title company’s settlement statement when selling or borrowing against their home (when there is an outstanding judgment). In most cases, the escrow process will ensure that money judgments will be paid out of the escrow proceeds (after the title company has reserved for the homeowner up to $250,000 in equity as the debtor’s homestead exemption).
2. Creditors now have an added incentive to pursue judgments. Because an individual’s residence is often their largest investment, the ability to lien a residence provides creditors with a path to payment they have not previously enjoyed. Creditors on consumer debts, loans, and medical bills hereafter might be further motivated to pursue judgments, rather than settle claims, knowing that their payment is, as a practical matter, secured (as long as there is equity in the debtor’s home). The rationale of the first point, above, illustrates the strength of a judgment creditor’s position.
The attorneys at Sacks Tierney have extensive experience in creditors’ rights and real estate collection matters to safeguard both homeowners’ and creditors’ interests and entitlements.
Stephen A. Benson is a Certified Specialist in Real Estate Law.
James S. Samuelson specializes in all matters relating to Corporate Restructuring and Bankruptcy.