As of January 1, 2022, two big changes happened to the Arizona homestead exemption. This is a big deal for homeowners. After all, a person’s home is often one of their largest investments. If you have a home, you want to protect it. You make sure it’s maintained. You keep insurance on it in case of a fire or other disaster. And it’s where you spend a significant portion of your life. You probably also associate it with your family and love life. It’s where you keep your family photographs and other priceless items.
You may even refer to your home as your castle. That’s where you let your hair down and relax. It’s your safe place.
What is the Arizona Homestead Exemption?
In bankruptcy, a homestead exemption protects equity in your home.
Under the Arizona homestead exemption law, the following are exempt (up to applicable exemption amount, which is discussed below):
- your house and the land upon which it resides
- your condominium or cooperative
- your mobile home, and
- the land upon which your mobile home sits if you own the land.
In each of the above instances, the dwelling (house, condominium, cooperative, or mobile home) must be your residence— that is, you must live in the dwelling.
The Arizona homestead exemption also applies to cash proceeds from the sale of a homestead property. These proceeds remain exempt for 18 months from the sale of the property, or until the proceeds are used to purchase a new homestead, whichever time is shorter.
The Arizona Homestead Exemption is Automatic
The Arizona homestead exemption is automatic – you don’t have to file a homestead declaration to claim the homestead exemption in bankruptcy. However, if you have more than one property to which the homestead exemption could reasonably apply, a creditor might require you to designate to which property the exemption applies.
The Arizona Homestead Exemption Has Increased to $250,000
The first change is that the Arizona homestead exemption has increased from $150,000 to $250,000. Before 2022, an Arizona homeowner had the right to shield $150,000 of equity from creditors. Arizona homeowners could take comfort in the homestead exemption. That is the law that protected part of the equity in their home from legal jeopardy. It didn’t matter how long their list of creditors became. It didn’t matter how much debt they may have incurred; the law protected their home.
As of January 1, 2022, that Arizona homestead exemption has increased to $250,000.
That seems like a good thing, right? Arizona homeowners used to be able to protect only $150,000 of the equity in their homes. Now they can protect $250,000. And this comes at a great time. Property values have skyrocketed recently. And that has resulted in more equity to protect.
BUT … here is why Arizona homeowners are actually less protected now.
Judgments Now Automatically Attach to Homesteads!
Arizona’s homestead exemption protection is codified at A.R.S. § 33-1101. The statute previously provided:
“[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.”
Also, A.R.S. § 33-964, previously stated 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.”
Here’s how those two statutes worked together before the recent change in the law. Arizona law held that a judgment did not attach as a lien on Arizonans’ primary residence. It did not matter how much equity there was in the home. Thus, before 2022, 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).
The recent change to the Homestead Act revoked that protection.
Under the new law, civil judgments automatically attach to any real property owned by debtors. This includes a family’s homestead. Also, the new law applies 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. Those judgments will have to be paid before clear title can transfer to a buyer or in a refinancing of the property. And that means those judgments must now be paid before the owner can receive any of their proceeds from the sale or refinance.
Here’s an example.
A seller lists their home for sale at $700,000. They may owe $350,000 on their existing mortgage or loan note, leaving the homeowner with $350,000 in equity. Under the previous Arizona homestead exemption, the debtor could sell the property and keep 100% of their equity. As of 2022, 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 $350,000 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.
What This Means for the Future
Buyers and sellers alike should take note of the new Arizona Homestead Exemption. It will likely affect many 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. 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. Those judgments might range from unpaid credit card debt to commercial loans that the homeowner personally guaranteed.
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.
Want to Protect Your Home from Lawsuits and Creditors?
If you want to protect your home from judgments and creditors, book a Strategy Session with one of our attorneys. We are here to help.