Your home is a valuable asset. You most likely invested a great deal of money into your home. For most people, their homes are in fact their biggest investments. But did you know that if you experienced financial troubles and a judgment creditor records a judgment that it operates as a lien on your home?

Arizona does offer some protection in your home through what is called a homestead exemption. The homestead exemption is a legal protection device that can help protect you from losing a home to judgment creditors and/or protect substantial equity in bankruptcy. A homestead refers to a dwelling that a homeowner lives in, whether it is a free-standing house, a condo, or sometimes even a manufactured home. As of now, in Arizona, you are only entitled to $150,000 in equity for a homestead exemption in your home from these creditors after subtracting consensual liens. Some states like Texas and Florida offer an unlimited homestead exemption.

But, there is good news and hope for homeowners on the horizon in Arizona. In a recent change to Arizona law, as of January 1, 2022, the homestead exemption will increase to $250,000 in equity for the primary residence of Arizona residents. Although still far less than what it should be considering the substantial increase in property values in Arizona recently, it is definitely a step in the right direction. Once the increase becomes effective as a matter of state law, the increased amount will also protect up to $250,000 of equity in bankruptcy proceedings.

However, with that additional homestead protection came some “gotchas” that the Arizona legislature snuck into the bill that will help creditors. First, the new law makes existing judgments become automatic liens on a person’s home retroactively provided certain recording requirements are met. This change could cause a major upheaval for homeowners that have filed for bankruptcy protection because without reopening their cases and moving to avoid that lien, it would still remain on their home. Reopening the case is no sure result.

The second “gotcha” in the new law creates a new method for a judgment creditor to automatically get paid when a homeowner refinances a homestead property before any remaining cash proceeds are paid to the homeowner for any refinances that occur after January 1, 2022.

The new changes to A.R.S § 33-964 also gives a title company broad say in a sale of homestead property in whether there is insufficient equity in the property and whether the money should go to the creditor or the homeowner. If the anticipated payment to the homeowner is 80% or more of the amount of the homestead exemption, the statute creates a procedure for the title company to extinguish the judgment lien from the property. If the creditor has not updated its contact information, the judgment lien might be released without the creditor’s knowledge. An unintended consequence of this new power could open the door for litigation against title companies by homeowners and creditors who feel the title company did not make the right decision on what to do with the proceeds.

Written by Attorney John Lohr, Jr., jll@hgplaw.com.

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