August 3rd, 2009

The Real Deal: Your Legal Update for Real Estate
Volume 2, Number 2, August 2009

The Wings of the Arizona Anti-Deficiency Statute Have Been Clipped – A Bit
By Adam B. Decker, Esq.
adecker@jacksonwhitelaw.com
A.R.S. Sec. 33-814 is the Arizona Anti-Deficiency Statute governing Deeds of Trust.  Most loans on residential properties in Arizona are secured by Deeds of Trust.  According to this Statute, when homeowners lose their homes by a private  trustee’s sale, the selling lender cannot later sue the homeowner for losses suffered by the lender, so long as certain criteria are met.   In other words, the lender’s recovery is limited to the sales price at the trustee’s sale.

A homeowner generally qualified for the Statute’s protection when: 1) the home is located on 2.5 acres of land or less; 2) the home is used only as a dwelling for one or two families; 3) any refinancing or equity borrowed against the home was used for the home’s original purchase or to improve the property; and 4), the home was occupied by either the homeowner or a tenant.  These criteria will change on September 30, 2009, following a recent change in the law.

Under the change in the law, the borrower must now additionally utilize the home as a dwelling “for at least six consecutive months” in order to be protected by the Statute.  It is unclear from the change whether or not the home must be utilized for this time period directly before the beginning the trustee sale process.  What is clear is that a borrower must occupy the home for at least six consecutive months before the Statute’s protection is triggered.  Moreover, a strong argument can be asserted that the occupancy requirement also extends to a tenant who is living in the property to the protection of the landlord.

One should not be surprised to see trustee’s sales set for a date prior to September 30, 2009, being continued or rescheduled until after that date so that lenders can take advantage of the change in the law.  However, a lender’s decision to continue or reschedule a sale for that reason should be heavily scrutinized.

Are HOA Fees Dischargeable in Bankruptcy?
By John N. Skiba, Esq.
jskiba@jacksonwhitelaw.com
With a struggling economy and record numbers of foreclosures and bankruptcy filings, payment of Homeowner Association (HOA) fees often is secondary to many other pressing concerns.  However, with the sweeping amendments made to the Bankruptcy Code in 2005, anyone who is facing foreclosure and/or a bankruptcy may have the displeasure of realizing that even if they file for bankruptcy, they still may owe HOA fees.

Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the law was pretty clear – any HOA fees incurred prior to filing bankruptcy would be discharged through the bankruptcy process; any fees incurred after the filing of the bankruptcy case would not be discharged as long as the homeowner physically lived in the house.

However, with the passage of BAPCPA, the language of the Bankruptcy Code was changed.  Now, in a Chapter 7 bankruptcy filing, any HOA fees incurred prior to filing bankruptcy are still discharged, however, any HOA fees incurred after the filing of the bankruptcy case are not discharged so long as the homeowner owns the house.  This change means that if a homeowner files for bankruptcy, moves out the house, does not pay the HOA assessments, and then the house is sold (e.g. by the homeowner, lender, etc.) six months later, the homeowner is still personally liable for the HOA fees incurred from the date the bankruptcy case was filed until the day the property is actually foreclosed upon.

An important exception to this rule is for those people who seek bankruptcy protection by filing a Chapter 13 case.  A Chapter 13 bankruptcy is a reorganization of the debts where some debts are repaid, whereas a Chapter 7 bankruptcy case is a liquidation of the filer’s assets to pay creditors.  In a Chapter 13 case, the debtor files a repayment plan which would include a portion of the HOA fees.  After the debtor pays what is proposed to the HOA, all remaining fees are discharged through the bankruptcy – regardless of when they were incurred.

Does the Mortgage Debt Relief Act of 2007 Apply to an Unfinished Custom Home?
By Aaron M. Finter, Esq.
afinter@jacksonwhitelaw.com
Homeowners are questioning whether the Mortgage Debt Relief Act of 2007 (the “Act”) applies to an unfinished custom home.  The Act provides tax relief to taxpayers whose mortgage debt has been forgiven on their principal residence through processes such as trustee sale, judicial foreclosure or short sale.  The Act eliminates tax liability on the forgiven amount if taxpayers had used the forgiven debt to buy, build, or substantially improve their “principal residence.”

The term “principal residence” precludes the Act from applying to an unfinished custom home.  Under the Act, a home resided in by the taxpayer throughout most of the year is generally considered the principal residence, which, obviously excludes “unfinished” custom homes.  Moreover, the taxpayer must have lived in the home for two of the five years preceding the sale or exchange of the property in question.  An unfinished custom home does not satisfy this definition of a principal residence.

Borrowers who cannot afford to complete construction of their home cannot enjoy the tax benefit provided under the Act.  This means that any forgiven mortgage debt on an unfinished home is included in the taxpayer’s gross income.  As gross income, taxpayers must pay taxes on the forgiven debt just as if they earned the money through their labors.