Arizona Bill wants Judgment Creditor to get paid before homeowners when house is refinanced (something Arizona law has not allowed since mid 1950s).
Concerns about Arizona HB 2617, especially with the amendments: will allow old and new judgments to attach to homesteads.
What the bill and amendments do: There are three parts to the bill & amendments. First, the bill raised the homestead exemption from $150,000 to $250,000. Second, the bill provides that any existing judgment or lien to become an automatic lien on a person’s home. This provision is retroactive and reverses the law that has been in place for more than 50 years, protecting the homestead from judgments. Third, the Toma amendment to the bill allows at judgment creditor to seize any funds “from the refinancing of a homestead property …and the judgment creditor must be paid from those cash proceeds before any remaining cash proceeds are paid to the judgment debtor (the homeowner).”
The homestead exemption has been an essential protection for Arizona residents since nearly the beginning of Statehood. The Courts have concluded that the legislative purpose of the homestead exemption statutes was to allow the family to keep a certain amount of money to provide a shelter for the family. See for example, Union Oil Co. v. Norton-Morgan Commercial Co., 23 Ariz. 236, 202 P. 1077 (1922); Security Trust & Savings Bank v. McClure, 29 Ariz. 325, 241 P. 515 (1925); Wheeler Perry Co. v. Mortgage Bond Co., 41 Ariz. 247, 17 P.2d 331 (1932); Schreiber v. Hill, 54 Ariz. 345, 95 P.2d 566 (1939); Seaney v. Molling, 62 Ariz. 81, 153 P.2d 532 (1944). The present legislation will allow the invasion of the homestead overturning the long-standing legislative protection of the family to the benefit of creditors. It should be noted that the homestead does not extend to obligations for child support or alimony.
The bill and amendments change the existing law. Currently the law (A.R.S. §964 (A)) does not allow judgments to attach to homesteads. Under the new bill, all existing recorded judgments or liens will automatically attach to all property, including a family’s homestead. The text of the new bill reads:
“B. A CIVIL JUDGMENT SHALL BECOME A LIEN ON THE REAL PROPERTY OF THE JUDGMENT DEBTOR, INCLUDING THE JUDGMENT CREDTOR’S HOMESTEAD PROPERTY, THAT IS LOCATED IN THE COUNTY N WHICH THE JUDGMENT IS RECORDED, WHETHER THE PROPERTY IS THEN OWNED BY THE JUDGMENT DEBTOR OR IS LATER ACQUIRED, FROM AND AFTER THE TIME OF RECORDING AS PROVIDED IN SECTION 33-961 UNTIL SATISFIED OR LIFTED. THIS SUBSECTION APPLIED RETROACTIVELY TO ALL JUDGMENTS WITHOUT REGARD TO WHEN THE JUDGMENT WAS RECORDED.”
When a bankrupt debtor requests an order stating that a discharged judgment does not attach to their homestead exemption, for decades the judges have refused to issue these orders because of A.R.S. §33-964 (A). Under A.R.S. § 33-964 (A) “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)” This proposed bill will cause a deluge of filings in the bankruptcy court, causing thousands of bankruptcy cases to be reopened in order to obtain the order to avoid any existing liens that the judges previously denied.
A bankruptcy discharge eliminates the debt owed to the judgment creditor. A secured lien stays attached to the collateral (the home), if the secured lender is not paid they may foreclose, but may not sue the borrower. This bill will allow all judgment creditor claims to survive the intent of the bankruptcy discharge – to give the debtors an opportunity for a fresh start.
The Livingston amendment and the Toma Floor amendment to the bill allows the judgment creditor to invade the homestead proceeds in the case of a refinance. The homeowner refinances their home for several reasons, but normally to reach the excess equity in their home, which is usually less than their homestead proceeds. For instance, the home is worth $300,000, with a first mortgage of $150,000, leaving equity of $150,000 which is protected as a homestead exemption. The borrower needs to repair their home, replace broken A/C and pay off medical bills so puts a second deed of trust on their home for $90,000. Resulting in two secured liens: first for $150,000, a second for $90,000, leaving the homeowner $60,000 in a homestead exemption. The Toma floor amendment would allow a judgment creditor to take the refinancing funds (up to $90,000 – the loan amount) leaving the owner of the home with no proceeds to use for the repairs, broken A/C or to pay off medical expenses, but now to have two loans and only $60,000 in equity (homestead funds). Prior to signing the loan agreement, there is no warning to the homeowner/borrower the judgment creditor will receive all the funds first. The end result is the homeowner/borrower cannot make the necessary repairs on their home, most likely do not pay the second lender, who ultimately forecloses on the home.
Toma amendment, Page 2, lines 1-3 – makes it very clear that should the borrower refinance their home, the borrower loses their homestead exemption as to the cash proceeds. “THE HOMESTEAD EXEMPTION DOES NOT ATTACH TO THE PERSON’S INTEREST IN IDENTIFIABLE CASH PROCEEDS FROM THE REFINANCING OF THE HOMESTEAD PROPERTY.”