Most homeowners have probably at least heard
of the homestead exemption. Many don’t
really know how it works, however. Now is
an opportune time to go over it since the
Arizona legislature this year increased the
amount of the exemption for the first time
in many years, from $100,000 to $150,000.
What does it mean when we say that the amount
of the homestead exemption is $150,000? It
means that up to $150,000 of equity in a person’s
residence (single family residence, condominium,
co-op apartment, or land with manufactured
home) is exempt from the claims of creditors.
If you own your home without a mortgage and
its current market value is less than $150,000,
it is completely exempt from claims of creditors.
If you own your home without a mortgage and
it is worth more than $150,000, your creditors
can take it to satisfy your debts, but they
have to give you the first $150,000.
To fully explain how the exemption works,
a basic familiarity with the debt collection
process is necessary. If a creditor pursues
a lawsuit against a debtor, the creditor’s
objective is to obtain a judgment against
the debtor. After obtaining the judgment,
the creditor will usually record the judgment
in the office of the county recorder of the
county where the debtor lives. The reason
for recording the judgment is that the recorded
judgment becomes a lien against any real estate
the debtor owns in that county.
The creditor can enforce the lien of the
judgment by either undertaking the legal process
for a sheriff’s sale of any real estate
the debtor owns, or waiting until the debtor
sells any of his real estate. Now, let’s
assume that the judgment lien is $100,000,
the only real estate the debtor owns is his
house, and the house is worth $200,000. If
it is sold at a sheriff’s sale, or if
the debtor sells it while it is subject to
the judgment lien, the creditor gets only
$50,000, while the debtor gets the remaining
$150,000.
The debtor’s $150,000 remains exempt
from the judgment lien (and the claims of
any other creditors) as long as he promptly
invests the money in a replacement residence.
In our example, then, he still owes the creditor
$50,000, but the creditor can’t collect
the remaining debt from a sale of the debtor’s
home.
In years past, in order for the debtor to
assert his rights under the homestead exemption,
it would have first been necessary for him
to record an affidavit declaring that his
home was subject to the homestead exemption.
That requirement was done away with several
years ago, although you can still do it (or
a creditor can demand that you do it) if you
own more than one house and it isn’t
clear which one you claim as your residence
for purposes of the homestead exemption.
In the above example I assumed that the debtor’s
home had no mortgage on it. I did so only
to keep the explanation simple. The presence
of a mortgage doesn’t change how the
homestead exemption works. The debtor’s
exemption attaches to his equity, that is,
the difference between the value of the property
and the amount he owes on the mortgage.
There is an important distinction between
a mortgage and a judgment lien, however. If
the debtor’s equity in his home is less
than the amount of the homestead exemption,
the homestead exemption prevents the creditor
from using a sheriff’s sale to satisfy
the judgment lien. If the debtor doesn’t
pay his mortgage, however, the homestead exemption
doesn’t prevent the mortgage lender from
forcing a sale of the property to satisfy
the mortgage. The distinction arises from
the fact that the mortgage, unlike the judgment
lien, is a consensual lien, i.e. it was placed
against the property with the consent of the
debtor. The debtor agreed to let the mortgage
lender place the lien against his home in
exchange for the mortgage loan, so he shouldn’t
then be able to claim that his equity is exempt
from that lien.
Recently some of the folks advocating for
reform of homeowners’ associations have
suggested that the homestead exemption should
be effective against liens for unpaid homeowners’
association assessments. They contend that
homeowners whose homes are subject to homeowners’
association liens are being unfairly deprived
of their homestead exemption. Their argument
is contrary to the concept of the homestead
exemption as being ineffective against consensual
liens. To those who say that a lien for unpaid
homeowners’ association assessments is
not consensual, the response is that they
agreed to it when they bought a house in a
subdivision governed by documents granting
such a right to the association. If you don’t
want to be subject to a homeowners’ association,
don’t buy a house in a subdivision that
has an association (haven’t I said that
before?).
One more fascinating tidbit about the homestead
exemption: the amount of the exemption varies
from state to state. In some states, the amount
can be unlimited. That’s how O. J. Simpson
can still own a very expensive home in Florida
even though the survivors of Mrs. Simpson
and Mr. Goldman have a multi-million dollar
judgment against him. Aren’t you glad
to know that?
