In May Governor Ducey signed into law a measure that will increase Arizona’s Homestead Exemption from $150,000.00 to $250,000.00. The new law will go into effect in January, 2022. This is good news. An extra $100,000.00 of homeowner equity will be protected from creditor judgments. But the changes go beyond a simple increase in the exemption of house equity from creditor claims. Here is where it gets complicated.
Under current Arizona law, a creditor’s judgment can become a judgment lien upon real property owned by the debtor if it is recorded along with a judgment information statement. Judgment liens currently encumber only non-exempt real property. They do not attach to homestead property (property a debtor resides in as opposed to a rental or investment property).
Because of this, a homeowner’s equity, up to the homestead exemption amount, can be preserved from creditor claims. A judgment can be discharged in bankruptcy. Since the judgment lien does not attach to a debtor’s home, no lien against the home survives the bankruptcy. A Debtor’s equity in the homestead property is preserved. This has been the rule in Arizona for decades.
This will now change. The new law provides that a judgment lien will attach to all property, including homestead property—and this applies to all judgments, both existing and newly obtained. The law also provides that, should a home be refinanced, judgment liens shall be paid first before any money is disbursed to a homeowner.
Because judgment liens soon will attach to all real property owned by a debtor, a bankruptcy filing will no longer be enough. A bankruptcy will still discharge a debtor’s obligation to pay the debt, but the lien will remain on the debtor’s home. It will still need to be paid upon refinance or sale of the home. It will be important to seek bankruptcy court approval to avoid the lien of a judgment where it impairs a debtor’s homestead exemption.
It is clear that greater care will need to be taken when filing bankruptcy. Where possible, it would be preferable to file before judgments are entered. Filing bankruptcy is a major decision and should only be made after careful consideration. Bankruptcy will still be, for many, an important part of an overall plan for financial recovery.
Platt and Westby, P.C. has offices in Phoenix and Gilbert, Arizona.