Anti-Deficiency Laws in Arizona
When a mortgage company forecloses upon a house, it
will turn around and sell the home in order to recover any money owed by
the previous home owner. This amount includes the previous mortgage
amount, any late payments, lawyers fees, and administrative costs incurred
during the foreclosure process. In some cases, a lender may only be
able to sell the property at a fraction of the cost. The result is
that the lender losses money on the transaction.
For example, a lender loans a person $100,000 to
purchase a home. Two years later, the home owner fails to make the
payments and the lender is forced to foreclose. When the lender
sells the property, it is only able to sell it for $80,000. This
results in a $20,000 loss to the lender.
In some states across America, the lender may be
entitled to receive the deficiency judgment in court and come after the
ex-home owner for the remaining balance owed. This means that the
lender could sue the ex-home owner for $20,000 using the example
above. In Arizona, however, there are limitations to a deficiency
incurred during foreclosure.
Arizona's "anti-deficiency" statutes
prevent a lender from suing a person for any losses on a home after
foreclosure. As outlined in Arizona
Revised Statutes, Title 33, Chapter 6.1, a person may not be sued by
his or her lender if the property is located on 2.5 acres or less and is a
single family residence or duplex. This only applies if the decrease
in value is not due to the home owner's neglect.
If a lender seeks a deficiency judgment, it has 90
days after the sale of the property to begin judicial proceedings to recover any losses. Failure to
do so may result in the lender's loss of its right to recover the
deficiency.
However if a home owner fears that he or she does not
qualify for this exception, a deficiency judgment may be avoided by
deeding the property back to the lender prior to foreclosure. This
is known as a deed-in-lieu of foreclosure. By accepting the deed,
the lender is agreeing to accept the property for the amount that the
person owes, thus eliminating any potential deficiency.
It is important to note that should a person deed the
property back to the lender, he or she may be taxed on the amount of the
deficiency that was forgiven by the lender. In other words, if the
home owner in the previous example deeds the home to the lender, the
lender will forgive the $100,000 loan and accept the $80,000 as payment in
full. However, the ex-home owner may now have to report the $20,000
as taxable income on his or her next tax return.
The only exception to Arizona's anti-deficiency
statutes are VA loans. As decided by recent litigation, VA is
allowed to obtain a deficiency judgment despite current state laws that
prohibit such actions.
There is free help and assistance for home owners
facing the possibility of foreclosure. If you would like to talk
with someone about your situation, click
here.
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