Important Changes to Arizona Homestead Exemption Laws
On January 1, 2022 a new law will go into effect that changes the Arizona Homestead Exemption law. Homeowners and judgement creditors need to be aware of the changes and how those changes may affect them. The homestead law protects equity in a person’s home.
A homestead exemption protects a person’s equity in their home. It does not protect a homeowner against a claim of a mortgage holder or someone else to whom the homeowner has granted a consensual lien. It also does not protect a homeowner against a tax lien claim from the IRS. It does protect equity in the home from judgment creditors. The new law in Arizona will significantly change the current law.
At present (until January 1, 2022), the Arizona homestead exemption is $150,000. If a homeowner has a residence (which includes a house, a condominium, a cooperative apartment or a mobile home) that is worth $500,000 and has mortgage debt of $350,000 the $150,000 of equity is protected from claims of non-consensual creditors. The current law only allows a judgment creditor to be paid if that creditor goes through a process to force the sale of the house and gets enough money from the sale to pay the mortgages, the costs of sale and the homestead exemption. The current law does not allow a judgment lien to attach to the home in the event of a voluntary sale by the homeowner. In other words, even though the exemption is “capped” at $150,000 the judgment lien does not get paid (under current law) if the homeowner voluntarily sells the house. The current exemption protects all of the equity unless the judgment creditor initiates the action to force the sale of the house.
The new law will increase the exemption to $250,000 of equity but will change the current law to allow a judgment creditor to be paid in the event of a voluntary sale or a refinance of the property if the homeowner “takes out” money from the refinance. If a home is sold for $750,000 and has mortgage debt of $550,000 the entire $200,000 will go to the homeowner as their homestead exemption. Those proceeds can be protected in a separate bank account for eighteen (18) months and can be used to buy another home. If the home is sold for $750,000 and has mortgage debt of $400,000, there is “excess equity” of $100,000. If there are judgment liens for $100,000, those liens will be paid from the sales proceeds, which is different than the current law. What if the judgment liens total $200,000? It is not clear from the new law whether the homeowner gets the first $250,000 and the rest paid to judgment holders in chronological order or if the judgments are paid first.
If the homeowner refinances the home and has “cash back” in excess of paying the loans on the home, the judgment liens will be paid first before the homeowner can get cash from the refinance.
Title companies will have new obligations to notify lien holders of a sale and how the sales proceeds are being allocated. Judgment lien holders will have certain rights to demand accountings and dispute the conclusion of the title company. The provisions are complicated and anyone who sells a home after January 1, 2022 and has judgment liens on their home should consult with their attorney to make sure their rights are being protected.
The new law will not apply to anyone who has filed bankruptcy prior to January 1, 2022 and either has already obtained a discharge or the case is pending on January 1, 2022 and a discharge is entered. If you are contemplating the filing of a bankruptcy it may be time to carefully evaluate your options. Arizona real estate values have soared recently and many homeowners may have equity in excess of the current homestead exemption. They may also have judgment liens. Consultation with competent bankruptcy counsel is recommended.