June 8, 2021 - Recently, the Arizona Legislature increased the homestead protection to $250,000 and changed Arizona's homestead laws so that a recorded money judgment also becomes a lien against the homeowner's primary residence. HB 2617 was signed by the Governor on May 19, 2021, and becomes effective January 1, 2022.
Since before statehood, Arizona's homestead laws allowed homeowners to hold their primary residence free and clear of a recorded money judgment. If the creditor wanted to pursue the homeowner's equity in the residence above the homestead allowance, the creditor had to follow a judicial process ending in a sheriff's sale. If the homeowner sold the residence prior to the sheriff's sale, the new buyer obtained the property free from the creditor's claim. The Arizona Court of Appeals confirmed that scenario in Pacific Western Bank v. Castleton
, 246 Ariz. 108 (App. 2018).
Because of the Castleton decision, creditors pushed for a change in the homestead laws so that a recorded money judgment also becomes a lien against the homeowner's primary residence. Gust Rosenfeld attorney Scott Malm participated in the drafting of the legislation on behalf of the title companies.The good news for the homeowner:
the homestead exemption amount is increased to $250,000, which means that the homeowner's equity in the residence is protected from the judgment lien up to $250,000. And if the homeowner will receive less than 80% of the $250,000 homestead allowance from a sale, then a title company may unilaterally release the judgment lien against the residence as part of the sale.The bad news for the homeowner:
a potential delay in close of escrow is possible if the homeowner is expected to receive more than 80% of the $250,000 homestead allowance. In such a situation, a notice of the pending sale must be sent to the creditor. If the creditor objects to the close of escrow within 21 days of the notice, then the title company may not release the judgment lien even if the homeowner's sale proceeds are less than $250,000. The homeowner must get court approval to obtain a release of the judgment lien over such an objection. To discourage unreasonable objections, the court may award damages, attorney's fees and costs against the objecting creditor.
For refinances, different rules apply to a cash-out and no cash-out scenario. If the homeowner wants to receive cash from a refinance, then the creditor's lien must first be satisfied. If the homeowner will not receive any cash from a refinance, then the title company is authorized to record a notice of subordination of the judgment lien, meaning the judgment lien is junior to the new lender's deed of trust.
For more information or for any questions about the homestead laws, please contact any member of our Real Estate
or Creditors' Rights