Is my home safe from judgment creditors? In this day and age, many people, including our clients, seem to be finding themselves in trouble with creditors. Some resort to bankruptcy, while others try to stave off creditors on their own. Oftentimes they live in fear of losing their homes.
On the opposite side of the coin, creditors are actively looking for assets to satisfy their judgments. Such creditors frequently ask whether they can execute on the debtor’s residence. The answer is governed by the homestead exemption.
Homestead Exemption
The Arizona Legislature has created a homestead exemption, A.R.S. § 33-1101, et. seq., to protect homeowners from judgment creditors who want to execute on the debtor’s residence. The policy behind the exemption is to allow debtors the ability to keep their home unless there is significant equity (more than $150,000) that could be used to satisfy the judgment.
Under the homestead exemption, Arizona homeowners can protect up to $150,000 of the equity in their homes and, in many cases, keep creditors from conducting an involuntary sale of their property. ARS § 12-1101 contains the overarching summary of the rule:
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.
The biggest requirement is that the homeowner must reside in the residential property. The term reside is not defined in the homestead statutes, but other case law and good old common sense will provide the definition. It is worth mentioning that a debtor can be temporarily away from the residence for up to two years without waiving the homestead exemption.
Businesses and vacant property are not protected by the homestead exemption. Also, the homestead exemption does not apply to creditors conducting a trustee’s sale based on a deed of trust, which is the most common way that homeowners lose their homes.
Automatic Exemption
The homestead exemption is automatic. Arizona homeowners are no longer required to record a declaration of homestead with the county recorder’s office. Per ARS § 33-1102(A), the exemption is held “by operation of law and no written claim or recording is required.” If a person owns more than one home in Arizona, the creditor can require the homeowner to record a declaration of homestead to designate which property will be protected by the homestead exemption.
Sale of Homestead Property
A creditor who wants to conduct a sheriff’s sale on homestead property must be very cautious. Since the homestead exemption hinges on whether a person resides at the property, a creditor should first determine if the homeowner resides (or not) at the property. The failure to comply with the homestead exemption will result in the sale being “invalid” and conveying no interest at all.
If it is determined that the property qualifies as exempt, the creditor should then estimate the likely auction price, not the fair market value of the home, in deciding whether to pursue a sheriff’s sale. All consensual liens (e.g., mortgages or deeds of trust) must be paid off. By statute, the minimum sale price at auction must be the amount of any consensual liens plus $150,000 to be paid to the homeowner. In fact, the officer in charge of the forced sale is prohibited from accepting any bids lower than that amount. By way of illustration, if there is a $200,000 mortgage on the property, then the minimum bid amount must be $350,000, which is needed to pay off the consensual lien and give the homeowner $150,000 in equity. There is no credit bid available to creditors in the sale of homestead property.
Once a homestead property is sold, the debtor can apply any identifiable cash proceeds to a new homestead for up to eighteen months after the sale. ARS § 33-1101(C). The homeowner also has six months to redeem the homestead.
Abandonment
Homeowners should be aware that they can abandon their homestead rights by (i) waiver or (ii) by changing their residence. To waive homestead rights, the homeowner must record a declaration of abandonment. A homeowner can also abandon the homestead exemption by permanently changing his/her residence or temporarily residing outside the homestead for more than two years.
Conclusion
In many instances, Arizona’s homestead exemption does provide a safe haven to qualifying homeowners. However, creditors can force the sale of a homestead if there is more than $150,000 in equity generated by the auction. As a practical matter, it is often difficult to execute on homestead property because so many debtors have little or no equity in their homes.
Written by Casey Blais
Attorney at Law, Burch & Cracchiolo, P.A.
Phoenix, AZ.