The homestead exemption has been an essential Arizona consumer protection law since the beginning of Arizona statehood.

The purpose of the homestead exemption is to protect 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 from execution, including homestead property.” A.R.S. § 964(A) (emphasis added).

The bill eliminates this protection by automatically converting 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 the home. It puts families at risk of being left without shelter.

The consequences on debtors who file bankruptcy.

A bankruptcy discharge only relieves a debtor from its personal liability (i.e., the creditor is no longer able to sue or garnish a debtor for the debt). The purpose of a bankruptcy discharge is to give a debtor a fresh start by eliminating all debts. Bankruptcy judges have relied on the A.R.S. § 33-964(A) when holding that no lien attached to a debtor’s homestead and thus no lien could be avoided under the Bankruptcy Code. (i)   It is possible that thousands of bankruptcy cases will need to be reopened, at a substantial cost to the homeowner, to obtain a court order avoiding a lien that didn’t exist at the time of the original bankruptcy.  Some language was included as an amendment, but only time will tell if that language holds up to litigation of the issue.

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 bill amendments allow the judgment creditor to invade the homestead proceeds in the case of a refinance.

Homeowners refinance their existing mortgages to reach the excess equity in their home. Often, this amount is less than their protected homestead amount.    When a borrower is struggling financially, the borrower can refinance the mortgage, take out existing equity and use that excess cash to pay essential living expenses, repair a home, and pay off 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, a judgment creditor can take a homeowner’s equity upon refinance without regard for the exemption.

This happens without warning to the homeowner.   If someone refinances their home, expecting to receive cash to pay for repairs, necessities or other items, the judgment creditors get the money, not the homeowner.  That leaves the homeowner with nothing other than a higher mortgage balance. Judgment creditors would receive an automatic windfall and be allowed to take all the homestead exemption.

The bill and its amendments negatively affect other creditors.

By allowing a judgment to retroactively attach to a homestead, the new law will deprive many existing creditors of their lien positions, because the loan was granted subsequent to the date of the judgment. Similarly, holders of second or subsequent mortgages will likely be denied their rights to the house.

Results:

The provision to increase the homestead exemption to $250,000 is long overdue and a welcome change to existing laws.  However, converting judgments into automatic liens that attach to a person’s homestead grants no added benefit to judgment creditors, while significantly weakening the homestead protections granted to 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 and could potentially create chaos in the Arizona bankruptcy court. Giving judgment creditors greater rights in a homeowner’s equity upon refinance completely defeats the purpose of the homestead exemption.

Courts   have   repeatedly   reiterated   that   the   legislative   purpose   of   the   homestead exemption statutes is to allow the family to prevent judgment creditors from taking the family home.(ii) Judgment creditors (iii) are paid only if a sale takes place and then only after the homeowner receives their homestead exemption.

The bill, with its amendments, change the existing law to the extreme detriment of families who need basic shelter.

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.