Judgment Liens and Post-Bankruptcy Collection Against Real Property in Arizona
Arizona law provides a judgment creditor two alternative methods to collect a judgment from the value in a debtor’s home. The traditional method is for a judgment creditor to obtain a writ of execution that directs the sheriff to take possession of the debtor’s property, sell it, and deliver excess proceeds to the creditor after satisfying consensual liens. Alternatively, the judgment creditor may record the judgment in the county where the debtor’s real property is located. The recorded judgment then serves as a lien that is paid when the debtor voluntarily sells or refinances the property. A judgment lien is valid for as long as the underlying judgment remains valid.
In most states, judgment liens can impair a party’s homestead exemption and the bankruptcy code permits such liens to be avoided if they impair or affect a a homestead exemption. 11 U.S.C. § 522(f) allows a judgment lien to be avoided “to the extent that the sum of: (i) the lien; and (ii) all other liens on the property; and (iii) the amount of the exemption that the debtor could claim if there were no liens on the property; exceeds the value that the debtor’s interest in the property would have in the absence of any liens.” Litigation to avoid judgment liens on homestead properties is common in bankruptcy courts outside of Arizona.
However, in Arizona, a judgment lien does not attach to “homestead property” which means that the lien does not attach to the property regardless of the value unless it is a lien for child support or spousal maintenance arrearages. See In re Rand, 400 B.R. 749 (Bankr. D. Ariz. 2008). Judgment creditors who believe there is excess equity in a debtor’s homestead must force an execution sale under A.R.S. § 33-1105 before a debtor files bankruptcy. With respect to homestead property, judgment creditors cannot utilize the convenient remedy of recording the lien against the homestead and waiting for funds to be disbursed upon a voluntary sale or refinance. Thus, Section 522(f) avoidance is not needed in Arizona.
Creditors Can Enforce Liens That Survive Bankruptcy
In most circumstances, validly perfected judgment liens which precede a bankruptcy survive and are enforceable after bankruptcy. The discharge injunction in 11 U.S.C. § 524 does not prevent post-petition enforcement of valid liens and the secured creditor can enforce their rights against the non-homestead property (as opposed to against the debtor).
These judgment liens rarely result in a creditor seeking a writ of execution to foreclose but likewise sit silently only to be resolved at a later date when the property is sold and debtors are informed by title that the lien must be satisfied to sell the real property. Most people believe that a bankruptcy will resolve all judgment liens on real property but are surprised to learn that these judgment liens can survive bankruptcy and can complicate post-bankruptcy sales of real property such as vacation or rental homes that subsequently appreciate. These complications arising from judgment liens after a Chapter 7 bankruptcy are perhaps the primary reason to not allow a creditor to take a judgment and file bankruptcy prior to the entry of such judgment.
Judgment Liens May be Avoidable as a Preference in Arizona
If a judgment lien was recorded shortly before the bankruptcy, it can be avoided as a “preference.” The bankruptcy code allows a debtor to set aside certain pre-petition transactions that are unfair to creditors and attempts to avoid the principle of equal and equitable distribution. One area where a debtor can, and has a motive to, act to avoid a pre-petition preference is the recording of a judgment lien which allows a judgment creditor to receive more than they otherwise should receive. If a judgment lien is recorded within 90 days of filing (or up to one year if the creditor is an insider such as a friend, family or business partner), 11 U.S.C. § 547 allows the debtor to avoid the lien. Any avoidance action must be brought within two years of the filing of the petition. However, in most circumstances, the equity will go to the bankruptcy estate and the bankruptcy trustee is the only party with an incentive to avoid such lien.
Creditors Can Enforce Judgment Liens that Survive Bankruptcy
Judgment liens on real property that does not qualify for the homestead exemption will survive the bankruptcy and still be enforceable against any equity in the property despite the underlying personal debt being discharged. Debtors are wise to never let a creditor get a judgment to avoid this scenario from coming to fruition.