Under current law, up to $150,000 in equity proceeds in a debtor’s home is exempt from collection by creditors. Additionally, the homestead exemption has prevented judgment liens from attaching to a debtor’s homestead property. “. . . [A] recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.” A.R.S. § 33-964 (current) (emphasis added). The homestead exemption has operated to protect Arizona homeowners up to $150,000 in equity they may have in the property, and to allow them to sell their homestead property free and clear of any judgment lien, and without notice to any judgment creditor. If a judgment creditor wanted to collect against the homestead property, it currently must obtain a Writ of Execution and ask the sheriff to hold an execution sale of judgment debtor’s property. But for any sale to be completed, the sale price would have to first pay off all consensual liens and the full amount of the judgment debtor’s homestead interest ($150,000). In addition, if the judgment debtor sells the property prior to the completion of the sheriff’s sale, the judgment creditor is left without a remedy as to that property.

However, HB 2617 is substantially amending the current law. On May 19, 2021, Arizona Governor Doug Ducey signed the HB 2617 into law. Effective Dec. 31, 2021, the homestead exemption is increasing from $150,000 to $250,000. At first glance this may seem like a positive change for homeowners, but the new law also offers fewer protections against judgment creditors. On and after January 1, 2022, a civil judgment will become a lien on the debtor’s homestead and attach directly to the real property after the creditor records a judgment in the county where the real property is located. The attachment will be automatic and retroactive for existing recorded judgment liens, allowing creditors a chance to pursue any past judgment debts upon a debtor’s sale or refinance of a homestead property. Debtors will no longer own their homestead “free and clear” of judgment liens.

While this new law dramatically alters debtors’ rights, it creates several new ways for creditors to collect on judgment liens. First, creditors can look to the equity in homestead property as creditors can be paid from the proceeds of a judgment debtor’s sale of the homestead after the $250,000 exemption is paid to the judgment debtor. Second, and more importantly, judgment creditors are also now entitled to cash proceeds from a debtor’s refinance. “If the judgment debtor receives cash proceeds from refinancing the homestead property that is subject to a judgment lien, the judgment creditor must be paid in full from those proceeds before the judgment debtor…receives any proceeds.” A.R.S. § 33-964 (effective Dec. 31, 2021). This prevents the judgment debtor from siphoning equity out of the homestead without selling the property. Ultimately, the new law requires judgment creditors to be paid upon the refinance or sale of the homestead property before title to the real property may pass free and clear of any encumbrances, with certain exceptions based on the amount of proceeds expected to be paid to the judgment debtor from the sale.

For example, if after deducting from the proceeds of the sale the amount of any consensual liens and the reasonable costs of sale, the anticipated payment to the judgment debtor is less than eighty percent of the $250,000 homestead exemption (or less than $200,000), a title insurer may record a notice of partial release of judgment without prior notice to judgment creditors. However, if the anticipated payment to the judgment debtor is at least eighty percent of the amount of the homestead exemption (i.e., $200,000 or more), the title insurer must follow specific procedures to notify the judgment creditor that the judgment lien appears reasonably likely to be extinguished. If those procedures (which include among others, mailing notice via certified mail and return receipt requested) are followed, and no objection is lodged by the judgment lienholder, the title insurer may prepare, sign, and record a notice of partial release of the judgment lien, thereby extinguishing the judgment lien and allowing the property to transfer to purchasers and encumbrancers for value clear of the lien. The notice of partial release of the judgment lien does not affect a judgment lien on any other real property owned by the judgment debtor apart from the homestead property identified in the notice of partial release of judgment lien. Finally, a title insurer that prepares or records a notice of partial release of the judgment lien is liable to any party for the actual damages, including attorney fees and court costs, that are caused by wrongfully recording any notice of partial release of the judgment lien.

It is important judgment creditors understand their new rights pursuant to HB 2617 given that the law in this area has remained largely unchanged for several decades. With rising home prices across the Valley and throughout Arizona, some homeowners have suddenly found themselves with significant new equity in their homes, which as of the end of 2021, could be subject to collection by judgment creditors upon a sale or refinance by the debtor. Quarles & Brady attorneys are available to discuss this new law, and the rights and potential new avenues of collection that it provides creditors seeking to recover on their judgments.