Can Arizona Homestead Exemption Protect Homeowner from Foreclosure

A home was purchased in Gilbert with a $240,000 mortgage and after the home was purchased the homeowners borrowed $100,000 on a home equity line of credit (“HELOC”). The home is now worth less than $200,000 now. The homeowners are trying to get a loan modification on the first mortgage loan of $240,000, even if they do get the loan modification agreement they will probably not be able to stay current with the monthly mortgage payments. Additionally they have not made any payments on the $100,000 HELOC for the past two months. They do now want to lose their house to foreclosure and the husband recently started a new job, and in the next year or so they may be able to get out of their current situation. Can the homestead exemption under Arizona law protect them from foreclosure by either the first mortgage lender or by the HELOC lender?

The Arizona homestead exemption protects equity up to $150,000 in the principal residence of a homeowner, but this protection only applies to non-consensual judgment liens of creditors, e.g., collection judgments for credit card bills or medical bills. The homestead exemption does not protect a homeowner from consensual liens, e.g., liens on the home consented to by the homeowner at the time that the homeowner borrowed funds for a loan such as a mortgage loan, a HELOC, or a swimming pool loan. A.R.S. §33-1101. Additionally, even if the homestead exemption did apply, they do not have any equity to protect. Therefore, this couple should consult an Arizona bankruptcy lawyer to discuss possible bankruptcy protection to protect their home, including “stripping” of the HELOC as a second lien on your home, especially in light of the potential for improvement of your financial circumstances because the husband is employed again.

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