If you live in Arizona, and you have done any kind of research about what happens if you just ‘let your house go to foreclosure’ you have probably come across the Arizona Anti-Deficiency Statutes (ADS), and you have probably walked away confused.   The Arizona legislature, back in the late 70s/early 80s enacted a couple of laws that protect consumers – people like you and me.  Unfortunately, as is the case with most laws, it is a bit complicated to understand, and depends heavily on facts.  Here is a quick overview of how it works:

Question:  Can the Bank come after me for the difference between the mortgage balance and the amount the house was sold for at auction?

Answer:

  1. If your house is a single or dual family residence; and
  2. it is on 2.5 acres or less; and
  3. you, or someone, has actually lived in the residence; then…

…the bank that holds the Trustee’s Sale (usually the first mortgage) CANNOT come after you.  (Be sure to re-read the previous blog post entitled “Foreclosure in Arizona – The Basics” to find out why I did not simply say “the bank that is foreclosing” here).   They will likely issue you a 1099(C) (which is a tax form), and there may be some tax-consequences, but they CANNOT bring a law suit against you for the difference.  In some cases, you may be able to avoid tax-consequences as well, but as I am not a tax attorney, nor an accountant, the best I can do on that is refer you to an accountant on how that works.

Pretty nice, right?  Now, the next question has to be “What about the second mortgage?”  A different statute applies to the bank that is not holding the Trustee’s Sale, and here is how it works:

  1. If your house is a single or dual family residence; and
  2. it is on 2.5 acres or less; and
  3. you, or someon0ne, has actually lived in the residence; and
  4. 100% of the debt owed to the bank was used to purchase the property, then…

…even the second mortgage CANNOT come after you for any monies owed, but the same tax rules still apply. 

The main problem I see in my practice, and the reason why short sales are often the better way to go when bankruptcy is not an option, is that the second mortgage was NOT in fact used to purchase the house.  Unfortunately, and in the bluntest terms possible (I hope you will forgive my bluntness), if you pulled any cash out of your house, chances are the ADS will not protect you.

Now, if ADS does not protect you, and your situation is such that a short sale alone will not solve your financial troubles, bankruptcy may be the answer.  If you surrender your house in the bankruptcy, then the discharge will include the difference between the sales price and what you still owe, AND as an added plus, having the debt discharged in bankruptcy is one of the exceptions to the general rule of taxation.

This is about it, in a nutshell.  Sounds pretty easy, right?  Well, chances are, your particular situation is a little more complicated, and in the spirit of ‘knowledge is power’ please do not hesitate to call or email us to talk specifics.  You can find all of our contact information on www.marcowimmerlaw.com.

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