New Law Allows Creditors to Invade Arizona Homestead Protection
Published On: May 15, 2021
On January 1, 2022, HB2617 will become the law of Arizona. Your home is no longer protected from your judgment creditors, which willhaveadevastatingeffectonArizona’sconsumers,and especially thosehardesthitbyCovid-19.
This bill was sponsored by Ben Toma, House Majority Leader, and pushed by the debt buyer industry, via one of the largest debt collector and debt buyer law firms in Arizona.
There are three parts to the bill and its amendments:
The bill increased a homeowner’s homestead exemption from $150,000 to $250,000 effective January, 2022. YEA, THAT IS WONDERFUL, BUT WHAT DOES THE HOMEOWNER GIVE UP?
The bill retroactively turns any existing judgment into a lien on the judgment debtor’s home (something that has never been allowed in Arizona).
If the homeowner refinances – the Toma amendment to the bill createdanewrightforjudgmentcreditors to receive refinance proceeds before the homeowner receives any funds, but the homeowner is liable for the entire refinanced debt, despite not receiving all, if any, of the funds.
The homestead exemption has been an essential Arizona consumer protectionlaw since Arizona statehood.
The purpose of the homestead exemption is to protect certain amount of equity in a person’s home. For decades, A.R.S. § 964(A) has prohibited judgments from attaching to a person’s home by providing:
“[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 fromexecution, including homestead property.” A.R.S. § 964(A) (emphasis added).
The bill eliminated this protection by automatically converting all old and new valid judgments into a lien that encumbers the person’s homestead. It puts the interests of the judgment creditor ahead of a homeowner’s interest in their home. It puts families at risk of being left without shelter.
The consequences on debtors who file bankruptcy.
When someone finances real property (e.g., a home), a lien attaches to the home. If someone has financial troubles (such as unemployment, medical, death of an income producer, or divorce) they may be forced to file bankruptcy in order to stop disastrous actions by their creditors (such as wage or bank garnishment). The goal of bankruptcy is to give a debtor a fresh start, by eliminating most debts, referred to as a discharge. If someone borrowed money, using their home as collateral, the bankruptcy discharge only eliminates a debtor’s personal liability (i.e., the creditor is no longer able to sue or garnish a debtor for the debt). But if the creditor, secured by a mortgage, is not paid they can foreclose on the home. Prior to this new law, that right to foreclose did not include judgment creditors (such as credit card or medical debts) because those judgments did not attach to someone’s home (referred to as their homestead). Bankruptcy judges have relied on existing law (A.R.S. § 33-964(A)) when holding that pursuant to Arizona law no lien attached to a debtor’s homestead, therefore there was no reason for a bankruptcy judge to sign an order avoiding the unsecured judgment. (This action is referred to as a Motion to Avoid Judicial Lien).
The new law changes that well-settled result. Now all valid judgments (no matter their age) will attach to someone’s home and, in refinancing to the homestead exemption. If someone ever filed for bankruptcy protection, with a recorded judgment, but did not obtain a court order avoiding existing judicial liens, there is a possibility that the old discharged judgment creditors will attempt to use this new law to shoehorn their way into foreclosing on the debtor’s home, even a home they did not own when they filed bankruptcy. Some bankruptcy language was included as an amendment, but only time will tell if that language holds up to litigation. The end result is that it is possible thousands of bankruptcy cases will need to be reopened, at a substantial cost to the homeowner, in order to obtain a court order avoiding a judgment lien. What a nightmare for the homeowner, the title companies and bankruptcy attorneys!!
This change in the law will most certainly lead to a significant increase in bankruptcy filings in order to eliminate the judgment liens on homestead property.
The Toma amendments to the bill allow the judgmentcreditor to invade the equity “homestead exemption” in the case of a refinance.
When a borrower is struggling financially, prior to this new law the borrower could refinance the mortgage, take out existing equity, and use that money to pay essential living expenses, repair a leaky roof, remediate mold, address other necessary home repairs, or pay emergency medical bills. The Toma Floor amendment effectively eliminates the homestead exemption by creating an exception to its application in the event of a refinance. As a result, when a homeowner refinances ajudgmentcreditorwill takethe refinancing monies before the borrower/homeowner receives any funds. Unless the title company explains the new law (arguably not their job), this will happen without warning to the homeowner. Leaving the homeowner with a higher mortgage balance and no additional funds.
Some judgments are decades old and long forgotten by the debtors. If the judgment was timely renewed it stays collectable until the judgment debtor dies (even then it may still invade the judgment debtor’s estate). Debt buyers, including the primary instigator of the new law, pay pennies on the dollar to buy debts. The new law does not take into consideration how much the debt buyer paid for the debt. Instead, the focus is on the original judgment, plus interest and costs, which may result in the 10-to-1,000-fold multiplier of the amount actually paid to purchase the judgment.
The bill and its amendments negatively affect other creditors.
By allowing a judgment to retroactively attach to a homestead, the new law wreaks havoc on the law of priorities for secured and unsecured creditors. There is some language in the bill that helps preserve priority for secured debts prior to the effective date of the law, but that does not apply to all new secured debts after January 1, 2022. This is going to dramatically affect the junior lending market and cause chaos on the title industry.
The provision to increase the homestead exemption to $250,000 is long overdue and a welcome change. However, converting judgments into automatic liens that attach to a person’s homestead, significantly weakens the homestead protections granted all Arizonans.
Retroactively granting lien rights to judgment creditors will be the foundation for a significant amount of litigation in both Arizona courts and federal courts, including the Arizona bankruptcy court. Giving judgment creditors greater rights to a homeowner’s equity upon refinance completely defeats the purpose of the homestead exemption.
Courts have repeatedly found that the legislative purpose of the homestead exemption statutes is to allow the family to prevent judgment creditors from taking the family home.
(i) In re Rand, 400 B.R. 749 (Bankr. D. Ariz. 2008) (holding that a creditor’s judgment does not attach to any homestead, regardless of equity, and judgment creditors are “denied the special and convenient remedy of obtaining a lien against the homestead and waiting for their collection to fall into their laps when their debtor has to sell or refinance).
(ii) Pacific Western Bank v. Castleton, 246 Ariz. 108, 434 P.3d 1187 (Ct. App. 2018) (affirming the longstanding rule that judgment liens never attach to a debtor’s homestead, regardless of equity); 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).
(iii) Excludes judgments for domestic support/child support which are not subject to the homestead exemption.
Which of the Arizona legislators voted that creditors and debt buyers are more important than homeowners? It was almost down party line. In the Senate, all but two Democrats voted for the homeowners. Kirsten Engel and Sean Bowie were the two democrats who decided that creditors and debt buyers are more important. All the Republicans voted for the creditors and debt buyers.
In the Senate, those who voted for debt collectors over the homeowner were: Nancy Barto, Sonny Borrelli, Sean Bowie, Paul Boyer, Kirsten Engel, David Gowan, Rick Gray, Sine Kerr, Vince Leach, David Livingston (the sponsor in the Senate), J.D. Mesnard, Tyler Pace, Warren Petersen (whomade the huge change allowing the liens to attach retroactively), Wendy Rogers, Thomas Shope, Kelly Townsend, Michelle Ugenti-Rita and Karen Fann.
In the House, who voted that creditors and debt buyers are more important than the homeowner? Again, it was almost down party line. All but one Democrat (Daniel Hernandez) voted for the homeowners. All the Republicans voted for the creditors and debt buyers.
In the House: those who voted for debt collectors over the homeowner were: Brenda Barton, Leo Biasiucci, Walter ‘Walt’ Blackman, Shawna Bolick, Judy M. Burges, Frank Carroll, Joseph Chaplik, Regina Cob, David Cook, Tim Dunn, John M. Fillmore, Mark W. Finchem, Travis Grantham, Gail Griffin, Daniel Hernandez, Jr., Jake Hoffman, Joel John, Steve Kaiser, John Kavanagh, Quang H. Nguyen, Becky Nutt, Joanne Osborne, Jacqueline Parker, Kevin Payne, Beverly Pingerelli, Frank Pratt, Bret M. Roberts, BEN TOMA (THE SPONSOR OF THE BILL), Michelle Udall, Jeff Weninger, Justin Wilmeth and Russell ‘Rusy’ Bowers.
MUSINGS BY DIANE:
Politically, this is a very strange time. Politicians are doing things that only a criminal would try (from the insurrection on January 6, 2021, to selling their soul to a narcissist). Arizona has become the laughing stock of the nation (equal to Florida and Texas). Voting rights are something to hold hostage. Why? Where is honesty, respect and common courtesy?
Arizona legislators just invaded our homestead rights. They cloaked this invasion in an appealing cover of raising the homestead from $150,000 to $250,000. But, just like the Greeks, this was a Trojan horse. Pretty on the outside, but deadly on the inside. After January 1, 2022 all past valid judgments attach to our homesteads.
Eventually everyone is going to harmed by this change in the homestead law. Secondary lending will slow down, and, probably, disappear completely for those with modest to low incomes. The consequences of refinancing will not be known by the common Arizonian, at least not until they try to refinance their home, only to find out the money goes to the creditor(s) who have judgments, not to the homeowner. So much for paying for the new roof, or dad’s heart surgery.
When will this insanity stop? When will people be more important than the dollar?
Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
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