At first glance, a new law (HB2617) increasing the Arizona homestead exemption in Arizona from $150,000 to $250,000 seems like a great thing. Effective January 2022, up to $250,000 of equity in a primary residence (your “homestead”) is protected from collection efforts by most creditors. This is especially timely because home values have seen steep increases in recent months. These increased values have resulted in increased equity seemingly overnight.
BUT the new law will retroactively and automatically turn any existing judgment, as well as any judgment obtained after the effective date, into a lien against the judgment debtor’s homestead. Under current law, judgment liens are simply void as to a homestead property. The new law effectively undermines the purpose of the homestead exemption.
From a practical standpoint this new law will require that to pass clear title to a homestead property upon sale or refinance, judgment creditors will have to be paid. This new law will eliminate an essential protection for some homeowners by deeply invading homestead protections that have been in existence for decades.
This new law could lead to an increase in bankruptcy filings. For our bankruptcy clients who are homeowners, their very first concern is whether they will be able to retain their home, while still discharging other overwhelming debt. Most of the time we are able to accomplish this goal through a Chapter 7, a Chapter 13 reorganization or a Chapter 11 reorganization. Retaining homes in bankruptcy will be easier under the new law, which protects an additional $100,000 in homestead equity. And bankruptcy law uniquely provides a mechanism to “avoid” or remove the judgment liens that will soon invade homestead equity because of the new law.
Bankruptcy case filings have decreased through the pandemic due to Covid-19 related mortgage forbearance programs, deferred student loan payments, eviction and foreclosure moratoriums, enhanced unemployment benefits, stimulus payments and a general willingness of creditors to make concessions for people during a difficult time. As we emerge from the pandemic, the full weight of deferred debt, unpaid rent and mortgage payments, guaranties of business obligations and more are expected to result in a wave of bankruptcy filings. Creditors will obtain money judgments, which will automatically turn into liens against the judgment debtors’ homes. Nevertheless, bankruptcy will provide many people with the fresh start they need and will also afford them with the unique ability to remove these judgment liens that would otherwise threaten their homestead equity.
Filing bankruptcy is always a serious decision that has many moving pieces. HB2617 has introduced new challenges for all homeowners and a new consideration for many people who may find themselves considering a bankruptcy alternative.