A Recap of the Arizona Anti-Deficiency Statute

An Arizona real estate lawyer, Arizona foreclosure lawyer or Arizona bankruptcy lawyer repeatedly advise potential clients that if property on two and one-half acres or less utilized as a dwelling unit is sold pursuant to a trustee sale (which is the method in which most lenders foreclose on property here in Arizona), the lender generally cannot sue you for any deficiency amount.  Furthermore, if you have a mortgage that was used to acquire property on two and one-half acres or less utilized as a dwelling unit and a deficiency amount exists after a foreclosure, the lender also cannot sue you for any deficiency amount.  How long a borrower can continue to occupy the house before a foreclosure occurs depends on how aggressive the lender decides to be.

For example, assume you have a first mortgage on a residence for $200,000 and a second mortgage for $50,000 as a line of credit you used to construct a swimming pool or remodel the house.  Assume that the residence has a current market value of $180,000.  The Arizona anti-deficiency statute prevents the first lender from suing you for the $20,000 deficiency amount after it forecloses.  However, the second lender can sue you for the entire $50,000 amount because that loan was not used to purchase the residence.  Once the second lender sues you (and yes, the lender will sue), you will most likely have no choice but to hire an Arizona bankruptcy attorney to discharge that liability in either a  Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

What about construction loans?

An Arizona Court of Appeals case involved a lender that granted a construction loan used to construct a residence.  Before construction was completed, the borrower defaulted on the construction loan.  The lender foreclosed on the property and sued the borrower for the deficiency amount.  The court held that even though the construction had not been completed and the property had not been utilized as a dwelling unit, the purpose of the construction loan was to construct a residence that the borrower intended to occupy upon completion.  In a surprise ruling, the court ruled that the Arizona anti-deficiency statute was still applicable, prohibiting the lender from suing the borrower for the deficiency amount after the foreclosure.

In response to this case, the Arizona legislature amended the Arizona Anti-Deficiency Statute in 2014 to preclude its application to property that contains a dwelling unit that was never substantially completed.  As such, the statute will generally not protect individuals who have not finished construction of the home (i.e., have not received a final inspection by the city or county).  This amended statute basically overturned the Court of Appeals case.

Yes, it is complicated!

Everyone has a different factual scenario regarding their mortgages.  Does the Arizona anti-deficiency statute apply to refinanced loans?  Does the Arizona anti-deficiency statute apply to short sales?  You must consult with an Arizona real estate lawyer, an Arizona foreclosure lawyer or an Arizona bankruptcy lawyer to educate yourself about the ramifications and liabilities.  Because of the continuing foreclosure crisis in Arizona, such a consultation is necessary in order to protect yourself from making a decision that could expose you to severe liability.