Will a Creditor be Able to Recover from a Recorded Judgment on a Homestead?

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Continuing our review of Arizona House Bill 2617 (AZ HB 2617), we will focus our attention on how the Bill impacts creditors. The original blog can be found here.

Creditors have several new collection rights for judgment liens. The first new right is that judgment liens now attach to the homestead property. Before the recently passed AZ HB 2617, a civil judgment created a judgment lien on all real property “except real property exempt from execution, including the homestead property.” The Arizona Legislature removed this language, entitling creditors with valid civil judgments to attach judgment liens to the homestead property. Homeowners no longer own the homestead property free and clear of judgment liens. All civil judgments will create a judgment lien on the homestead property, and all past civil judgments that were not avoided or discharged in a bankruptcy will also become judgment liens on the homestead property.

Judgment creditors now have an entitlement to the proceeds of a homestead property’s voluntary sale. In order to sell the homestead property, a judgment debtor will need to pursue a partial release of a judgment from the title insurer. After deducting the administrative costs of the sale and the amount of any consensual liens do not exceed 80% of the homestead exemption, then the judgment creditor will not receive the amount due under the judgment lien. Accordingly, the title insurer may record a notice of partial release of a judgment. If the sale proceeds are over 80% of the homestead exemption but less than the full amount, the judgment lien is only extinguished if certain conditions are met. One of these conditions is that the title insurer must provide the judgment creditor with twenty days’ written notice. If the judgment creditor objects to the notice with good cause, the title insurer cannot issue a partial release of the judgment lien. The title insurer may issue the partial release if the judgment creditor does not object to the notice. Finally, a title insurer cannot issue a partial release if the judgment debtor will receive more than the homestead exemption. Accordingly, a judgment lien will likely be a hurdle for judgment debtors seeking to sell their homestead property voluntarily.

Judgment creditors are now entitled to be paid in full from any cash proceeds that arise from a judgment debtor’s cash-out refinance of a homestead property. When a judgment debtor receives cash proceeds from refinancing a homestead property with an attached judgment lien, the judgment creditor is now entitled to be paid in full from the cash proceeds. This precludes a judgment debtor from ever collecting cash proceeds through refinancing a homestead property if there is a judgment lien on the property. AZ HB 2617 also modifies that “the homestead exemption does not attach to a person’s interest in identifiable cash proceeds from refinancing the homestead property.” Cash proceeds do not include “monies used to pay direct costs associated with the refinance or to satisfy liens with priority over a judgment lien on a homestead property….”

Judgment debtors will not be able to utilize the homestead exemption as a means of accessing the equity in their homes. Cash proceeds generated through refinancing will have to go towards any judgment liens on the homestead property first. Non cash-out refinances are unaffected.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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