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.