Is Your Homestead Still Protected in Arizona?

More changes are coming to Arizona.  May 19, 2021 Governor Ducey signed AZ House Bill 2617 into law, which increases the homestead exemption amount from $150,000 to $250,000. But not all parts of new law help those needing to declare bankruptcy. The new law also gives creditors expanded rights to go after a person’s homestead property under certain circumstances that were closed to them before.  Homeowners with judgment liens who decide to refinance on or after January 1, 2022 to take equity out of their homes will have to go pay judgment lienholders before they can receive any equity. Although the increase to the homestead exemption amount will help homeowner debtors in bankruptcy protect more of the equity in their homes that has recently accrued due to rapid appreciation, the Bankruptcy Code also limits the homestead exemption to only $170,350 if the home was purchased less than 3 years, 4 months prior to the bankruptcy case being filed.

PRIOR TO HB 2617

Before the changes, Arizona’s homestead laws, which have been around for decades, protected up to $150,000.00 in equity in a person’s home. A.R.S. § 33-1101(A).  That protection also applied to identifiable cash proceeds from the sale (voluntary or involuntary) of the homestead property.  A.R.S. § 33-1101(C).  In addition, judgment liens, which are liens created by recording a judgment, did not attach to homestead property.  A.R.S. § 33-964(B). 

Specifically, prior to the change, A.R.S. § 33-1101 (emphasis added) stated:

A. Any 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.

4. A mobile home in which the person resides plus the land upon which that mobile home is located.

B. Only one homestead exemption may be held by a married couple or a single person under this section. The value as specified in this section refers to the equity of a single person or married couple. If a married couple lived together in a dwelling house, a condominium or cooperative, a mobile home or a mobile home plus land on which the mobile home is located and are then divorced, the total exemption allowed for that residence to either or both persons shall not exceed one hundred fifty thousand dollars in value.

C. The homestead exemption, not exceeding the value provided for in subsection A, automatically attaches to the person's interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. Only one homestead exemption at a time may be held by a person under this section.

A.R.S. § 33-964(B), prior to the change, stated (emphasis added), “Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property.  Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.” 

The Arizona Court of Appeals, in Pacific Western Bank v. Castleton, 434 P.3d 1187, 1189-90 (Ariz.App. Div. 1 2018), held (referencing a case from 1922) that:

Section 33-964 thus establishes the general rule that a recorded judgment does not become a lien on homestead property.  See also Union Oil Co. of Ariz. V. Norton Morgan Commercial Co., 23 Ariz. 236, 245, 202 P. 1077 (1922) (holding that “no lien shall be permitted to attach to the real property claimed as a homestead”).  As the statute states expressly, individuals hold their “homestead property free and clear” of any judgment liens. See A.R.S. § 33-964(B).

Bankruptcy Judge Haines, in the case of In re Rand, 400 B.R. 749, at 755 (Bkrtcy. D. Ariz. 2008), noted that, because a judgment “is not a lien at all, it is not a lien that impairs the debtors’ homestead that can be avoided pursuant to Code §522(f).”

Accordingly, a homeowner, who lived in their home that had less than $150,000.00 in equity, could sell or refinance their home without having to first satisfy outstanding judgments from the equity obtained by the sale or refinance, even if the judgments were recorded in the county where the home was located, because any such judgment lien would not attach to their homestead property.

AFTER HB 2617

After the changes, the dollar amount of the homestead exemption increases to $250,000.00.  The exemption still attaches to identifiable cash proceeds from the sale of the property but does not attach to identifiable cash proceeds from refinancing the homestead property.  In addition, recorded judgments do become a lien on homestead properties.

Under the changes, the new A.R.S. § 33-1101 (emphasis added) would read as follows:

A. Any person eighteen years of age or over, married or single, who resides within this state may hold as a homestead exempt from execution and forced sale, not exceeding $250,000 in value, any one of the following:

1. The person's interest in real property in one compact body on 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.

4. A mobile home in which the person resides plus the land on which that mobile home is located.

B. Only one homestead exemption may be held by a married couple or a single person under this section. The value as specified in this section refers to the equity of a single person or married couple. If a married couple lived together in a dwelling house, a condominium or cooperative, a mobile home or a mobile home plus land on which the mobile home is located and are then divorced, the total exemption allowed for that residence to either or both persons shall not exceed $250,000 in value.

C. The homestead exemption, not exceeding the value provided for in subsection A of this section, automatically attaches to the person's interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. The homestead exemption does not attach to the person’s interest in identifiable cash proceeds from refinancing the homestead property.  Only one homestead exemption at a time may be held by a person under this section.

D. For purposes of determining the amount of equity in a homestead property that is sold or for determining whether the property owner is receiving cash back from refinancing the homestead property, the parties may rely on the valuation of the property in the final closing document disclosure that is used for that transaction.

Under the changes, the current version of A.R.S. § 33-964(B) would be stricken and replaced with a much longer subsection B, which would read, in part:

B. On the sale of homestead property that is subject to a judgment lien, the judgment creditor shall be paid from the proceeds of the sale after the homestead exemption amount is paid to the judgment debtor as prescribed in section 33-1101 and after payment of any liens on the property that have priority over the judgment lien.

Additionally, A.R.S. § 33-964 would contain new subsections.  The new subsection C would read, in part, as follows (emphasis added):

C. If the judgment debtor receives cash proceeds from refinancing the homestead property that is subject to a judgment lien, the judgment creditor must be paid in full from those proceeds before the judgment debtor or other person receives any proceeds, except that monies used to pay direct costs associated with the refinance or to satisfy liens with priority over a judgment lien on a homestead property do not constitute cash proceeds.

A.R.S. § 33-964 will also contain a new subsection G that limits the applicability of some of the changes until January 1, 2022.  Specifically, judgment liens will not attach to homestead properties that are sold, transferred or refinanced prior to January 1, 2022.  Judgment liens also will not attach to a debtor’s homestead property if the debtor receives a discharge or injunction against the enforcement of the debt in bankruptcy or other court prior to January 1, 2022, or if a bankruptcy case is filed prior to January 1, 2022 that ultimately results in a discharge.

Under the new laws, prior to January 1, 2022, a homeowner who lives in a home that has less than $250,000.00 in equity could still sell or refinance their home without having to first satisfy outstanding judgments from the equity obtained by the sale or refinance, even if the judgments were recorded.  However, after January 1, 2022, that same homeowner could not refinance their home in order to take out equity if there are judgment liens recorded in the county where the home is located.  The homeowner would have to first satisfy the recorded judgment liens from the proceeds of the refinance before they could obtain any of the funds themselves.

In bankruptcy, so long as the bankruptcy case is filed prior to January 1, 2022, and it ultimately results in a discharge, recorded judgments never attach to the debtor’s homestead property, even if the discharge is not granted until after January 1, 2022.  However, debtors with judgment liens in bankruptcy cases filed on or after January 1, 2022 are not without hope.  Although the judgment liens will attach to their homestead properties, Bankruptcy Code Section 522(f) (11 U.S.C. § 522(f)) allows a debtor to avoid a lien that impairs their ability to claim an exemption.  What that means is that a debtor in bankruptcy can ask the court to declare the lien to be invalid because it cuts into their homestead exemption amount.  Their request will be granted if the value of the property is less than the total of their voluntary or consensual liens plus their allowed homestead exemption amount.  Then, if they avoid or invalidate the lien in bankruptcy, they will come out of the bankruptcy case with a home that is free and clear of any judgment liens.

1215-DAY RULE IN BANKRUPTCY

Once the increase to Arizona’s homestead exemption is finalized, however, Arizona’s homestead exemption will exceed the amount that debtors are allowed to protect in bankruptcy if the home is acquired within 1,215 days (3 years, 4 months) of filing the bankruptcy case.  Pursuant to 11 U.S.C. § 522(p), “a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate [$170,350] in value”.

Accordingly, if a homeowner files bankruptcy, and the homeowner lives in a home that has more than $170,350 in equity but less than $250,000 in equity (still within Arizona’s new homestead statute), but the bankruptcy case is filed within 1,215 days after acquiring the property, then the amount of equity that they can protect will be limited to $170,350, despite Arizona’s increase.  Either the homeowner must pay the excess amount to the case trustee to keep the home, or the trustee will sell the home, give the homeowner $170,350, and pay the excess equity to the homeowner’s creditors.

CONCLUSION

The homestead exemption amount is increasing, but creditors are also being given expanded rights.  Refinancing after January 1, 2022 will be problematic for those that have judgment liens. Although the increase to the homestead exemption amount will help some debtors in bankruptcy, the Bankruptcy Code will still limit the homestead exemption to only $170,350 if the home was purchased less than 3 years, 4 months prior to the bankruptcy case was filed.  If you are worried about how the changes could affect you, contact Decision Support Solutions.