Update to How Arizona’s Homestead Laws Affect Your Residence

Update:

In November of 2022, we addressed the changes in Arizona’s Homestead Laws, in particular the way that the law had changed to allow judgment creditors to be paid out of escrow proceeds. At that time, the homestead exemption was $250,000. However, in November 2022, Arizona voters approved the Predatory Debt Collection Protection Act (PDCPA) (Proposition 209).  The new law increased certain statutory exemptions including the homestead exemption.  As of January 1, 2023, the Arizona homestead exemption is $400,000, increased from $250,000.  Under the PDCPA, the Arizona homestead is to increase annually starting on January 1, 2024, based on the increase in the cost of living.  The Arizona homestead now protects up to $400,000 in equity, providing Arizona homeowners with greater protection from general creditors.  However, the change made last fall made it somewhat easier for judgment creditors to enforce their judgments.

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.