Introduction
In November 2022, Arizona voters approved Proposition 209. This initiative aimed to limit the interest rates for healthcare debt and increase the Arizona exemptions for certain property and earnings from debt collection. Proposition 209 passed with 72% of the vote.
Proposition 209 also reduces what a creditor may garnish from a debtor’s wages. Prior to the passage of Proposition 209, a creditor could garnish 25% of a worker’s disposable earnings. Proposition 209 now allows a creditor to garnish only 10% of a debtor’s wages. In fact, a creditor may not garnish any wages if a debtor earns less than 60 times the current Arizona minimum wage.
A coalition of consumer advocates, healthcare providers, labor unions and faith groups supported Proposition 209. They argued it would protect Arizonans from predatory lending practices and abusive debt collection tactics. They also claimed that it would reduce medical bankruptcies and help people recover from financial hardship caused by the COVID-19 pandemic.
How Proposition 209 affects the Arizona exemptions
Arizona is an opt-out state. As such, Arizona residents must apply Arizona exemptions, not the exemptions set forth in Section 522(d) of the Bankruptcy Code.
Starting on December 5, 2022, Proposition 209 increased the amounts of many Arizona exemptions to protect property from collections, such as:
- The homestead Arizona exemption, which protects the equity in one’s primary residence, increased from $250,000 to $400,000.
- The Arizona exemption on household furniture, furnishings, goods and appliances increased from $6,000 to $15,000.
- The Arizona exemption on the debtor’s equity in one motor vehicle increased from $6,000 to $15,000. If the debtor or debtor’s dependent has a physical disability, from $12,000 to $25,000.
- The Arizona exemption on bank accounts increased from $300 in one bank account to $5,000 in one bank account.
Lawyers Challenged Proposition 209 and Have Lost…So Far
A group of creditors, debt collectors and business associations challenged Proposition 209. They argued it would harm Arizona’s economy and credit market by making it harder for lenders to recover their money and discouraging them from offering loans to low-income and high-risk borrowers. They also claimed it would increase litigation costs and create confusion and inconsistency in the application of the law.
Proposition 209 contained confusing language, leaving open the possibility that the more generous Arizona exemptions only apply to debts incurred after December 5, 2022. Although Proposition 209 was upheld by the lower court, the challengers immediately filed an appeal. The Court of Appeals recently held that the “savings clause” in Proposition 209 was not vague enough to make the law unenforceable and unconstitutional. It is expected that the case will be appealed to the Arizona Supreme Court.
In a separate case, the Arizona Court of Appeals recently held in an unpublished case that the more generous Proposition 209 exemptions apply to any wage garnishment that is commenced after December 5, 2022, even if the debt and judgment arose long before December 5, 2022.
Which Arizona exemptions apply in bankruptcy?
This “savings clause” in Proposition 209 also provides confusion in bankruptcy cases. The Bankruptcy Code is based in federal law, which supersedes any inconsistent State law. One provision of the Bankruptcy Code requires debtors to assert the Arizona exemptions applicable as of the bankruptcy filing date. So imagine a bankruptcy case that lists several debts, many (if not all of them) of which may have arisen prior to December 5, 2022. Some bankruptcy trustees have objected to the use of the more generous Arizona exemptions under Proposition 209. However, in light of the recent decisions from the Arizona Court of Appeals, it seems that the more generous Proposition 209 exemptions will apply to any bankruptcy case that is filed after December 5, 2022, even if the scheduled debts arose before such time. Of course, this could change if the Arizona Supreme Court accepts review of these Court of Appeals decisions.
The Proposition 209 confusion is a perfect example why those considering bankruptcy must hire a competent Arizona bankruptcy attorney. The cost for such an attorney is a drop in the bucket compared to what a debtor may lose if they file bankruptcy without the proper guidance and strategy.
How do you know if a debt was incurred before or after Dec. 2022?
Once a service is rendered or the good is purchased, then presumably the debt is owed. So, if you go to the doctor on November 1, 2022 for a service, the debt for that service is created. If the creditor sues you for not paying the November 1, 2022 debt, and the creditor obtains a judgment on March 1, 2023, then was the debt incurred November 1, 2022 or March 1, 2023? A debtor would argue he now has a new debt: a judgment, which also contains an amount for interest and attorney fees. The creditor would argue that the debt was incurred way back on November 1, 2022, and hence Proposition 209 should not apply. We still don’t have an answer, and that confusion is precisely why the challengers say the law should be thrown out and held to be vague and unconstitutional. And this becomes even more complicated in bankruptcy, as only one set of exemptions is supposed to apply to all of the debts listed in the bankruptcy. As of February 2, 2024 (the date of this comment), the Arizona Court of Appeals has not yet ruled on the challenge to Proposition 209. And even once it rules, the losing party will most likely appeal to the Arizona Supreme Court, furthering the confusion for some time. A good bankruptcy attorney can employ strategies to set up the best arguments that the Proposition 209 exemptions apply. All of the cases I have filed since December 1, 2022 have been successful applying the Proposition 209 exemptions. But that is not the case with all attorneys. And if a debtor makes the foolish mistake of not hiring a lawyer, that debtor is a prime target for a trustee or creditor’s lawyer to try to make an example of.