For years, Arizona homeowners have been able to take solace in the notion that no matter how long their list of creditors became, or how much debt they may have incurred, a certain portion of the equity in their home was protected from legal jeopardy. Arizona’s current homestead protection law affords homeowners the right to shield $150,000.00 of equity from creditors. Now, the Arizona legislature has elected to increase the homestead exemption from $150,000.00 to $250,000.00 effective January 1, 2022. On the surface, it appears Arizona homeowners are being granted additional safeguards from liens against their properties—and the timing could not be better with homeowners seeing meteoric increases in the value of their homes, and the corresponding increase in equity that accompanies the rise. A deeper dive into the law, however, reveals the opposite may in fact be true.
Arizona’s homestead exemption protection is codified at A.R.S. § 33-1101, which provides “[an]y person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following: (1) the person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides; (2) the person’s interest in one condominium or cooperative in which the person resides; (3) a mobile home in which the person resides; or (4) a mobile home in which the person resides plus the land upon which that mobile home is located.”
That statute is buttressed by A.R.S. § 33-964, which states that “[A] judgment shall become a lien for a period of ten years from the date it is given, on all real property of the judgment debtor except real property exempt from execution, including homestead property.” (emphasis added). Read together, prior to the recent amendment to the Homestead Act, Arizona law held that a judgment does not attach as a lien on Arizonans’ primary residence, regardless of the amount of equity in the home, and debtors were free to sell their homestead property without satisfying any judgment lien. See Pacific Western Bank v. Mark Wallace Castleton, 246 Ariz. 108, 434 P.3d 1187 (App. 2018).
That protection, however, is revoked pursuant to the recent amendment to the Homestead Act by HB2617. Under the bill, civil judgments will automatically attach to any real property owned by debtors, including a family’s homestead, and will apply retroactively to “all judgments without regard to when the judgment was recorded.” Stated another way, any judgment entered against a homeowner—at any time in the past or future for any amount and for any type of debt—will act as an encumbrance on real property. Beginning on January 1, 2022, all creditors will be able to attach their judgments debtors’ primary residences, and those judgments will have to be paid before clear title can transfer to a buyer or in a refinancing of the property and before the owner can receive any of their proceeds.
For example, a seller looking to sell their home for $800,000 may owe $400,000 on their existing mortgage or loan note, leaving the homeowner with $400,000 in equity. Under the current Arizona homestead exemption, the debtor could sell the property and keep 100% of their equity. Under HB2617, however, any time a creditor obtains a judgment against a homeowner and properly records the judgment with the county recorder where the property is located, the debt will attach to the home’s equity. So, in this scenario, if the homeowner has multiple judgments or a large money judgment against them, the $400,000 of equity is accessible to all creditors (both the mortgage lender as well as any other creditors holding judgments), subject to the increased homestead exemption of $250,000. Before the title company closes the transaction, the seller’s creditors will need to be paid off.
Buyers and sellers alike should take note of HB2617 as it will likely affect numerous real estate transactions early next year and beyond. Closings may be delayed (or thwarted) while a seller’s creditors are paid off from the sales proceeds, or sellers may be unaware of certain judgments laid upon their properties and need to seek bankruptcy protection to handle such judgments. Even those looking to refinance may be denied or delayed due to unknown judgments, which can range from unpaid credit card debt to commercial loans that were personally guaranteed by the homeowner.
Arizona homeowners can determine whether they have any outstanding money judgments that may affect their home value or proceeds derived from a sale by ordering a title report from a reputable title company. A title report will show all of the encumbrances laid against the homeowner’s property.
Our real estate attorneys at Provident Law® represent creditors and debtors and provide legal representation concerning a variety of real estate and collection matters. If you or someone you know has questions regarding the Homestead Act or any other real estate matter, contact us today to schedule an office meeting or virtual consultation with one of our real estate attorneys.
Christopher J. Charles is the founder and Managing Partner of Provident Law ®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS ® (the “AAR”). Mr. Charles holds the AV ® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions. Christopher regularly teaches continuing education classes at the Arizona School of Real Estate and Business, and he can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.
Blake Wilkie is an Associate Attorney with Provident Law®. His practice focuses primarily on real estate, real estate litigation, and preventive counsel. Blake is also a licensed Arizona real estate agent, allowing him the unique perspective of serving clients from both a legal and business point of view. He has represented commercial landlords, homeowners, and tenants in numerous transactions and cases, as well as advised on and prepared business formation documents and performed lending agreement legal analysis. From pre-litigation matters through final resolution, he is trained to identify a wide variety of legal issues that arise on a day-to-day basis, how to respond to them, and how to prevent them before they arise in the future. After graduating from the W.P. Carey School of Business at Arizona State University, Blake obtained his J.D. from the Sandra Day O’Connor College of Law at Arizona State University, where he was a Managing Editor of the Arizona State Law Journal.