Arizona Anti-Deficiency Statutes – The Big Picture

The real estate picture in Phoenix and surrounding areas continues to be grim and has been worse than most other cities across America. Many people owe much more than what their house is worth. The good news for Phoenix homeowners is that there are two anti-deficiency statutes in Arizona, one covers deeds of trusts (Arizona Revised Statutes Section 33-814(G)) and the other covers mortgages (Arizona Revised Statutes Section 33-729).

The Arizona anti-deficiency statutes can be best explained in the following manner. Generally, if you own a one-family home or a duplex, that is two and one-half acres or less, and that house is sold in a trustee sale or judicially foreclosed, the lender cannot attempt to collect any of your personal property for the difference between what the house is sold for and the amount that was owed. Further, this applies regardless as to whether this home/duplex was your principal residence or a rental. Sounds great, right? It is great for Arizona residents and the only real devil is in the exceptions to this law that are described below.

Judicial Foreclosure or Trustee Sale?

In Arizona, in event of default, the lender has the option of a trustee sale or a judicial foreclosure. Most often, lenders utilize the trustee sale approach in Arizona because it is less expensive and typically faster. However, from a legal perspective a judicial foreclosure can be more beneficial to a lender than a trustee sale due to the voluntary waste provision and the application of the statute to only “purchase money” mortgages.

Exceptions to protection of homeowners in Arizona

In Arizona, pursuant to A.R.S. Section 33-814(E), deeds of trust can be subject to a judicial foreclosure just as mortgages so you need to pay particular attention to A.R.S. Section 33-729 because that is the potentially more problematic statute from a borrower’s perspective. Essentially, A.R.S. Section 33-729 adds two main additional caveats that A.R.S. Section 33-814(g) does not have. The first of which is that the balance due on a mortgage foreclosure judgment can be pursued against the prior homeowner to the extent of the reduction in value of the home due to voluntary waste committed or permitted to occur by the that homeowner. The good news is that this does not happen often, because most owners of real property try to maintain the value of their property as best as possible. The loss of value in their property is most often due to market forces that they did not have control over. The other caveat is that Section 33-729 only applies to “purchase money” mortgages. “Purchase money” means that the mortgage was obtained for the express purpose of actually purchasing the house. In other words, if you obtained a home equity loan after you purchased the house that you used to purchase personal goods (as was common in the housing boom years), you are not protected by the anti-deficiency statute.

Bankruptcy Protection

Finally, if the anti-deficiency statute does not protect you, you still may have the option to file for bankruptcy protection to avoid having to pay back the deficiency balance from the foreclosure sale of your property.

Contact Us to Learn More About Arizona law and Bankruptcy

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