Many people learned from the Great Recession that Arizona is an anti-deficiency state, meaning that if you are foreclosed upon, the bank generally can’t go after the balance owed on the notice, if any. However, just because we are an anti-deficiency state, isn’t the end of the discussion. Things can get more complex depending on the loan and whether the debtor/homeowner has filed bankruptcy.

In Diaz v. BBVA, the Arizona Court of appeals recently published an opinion regarding a bank’s right to pursue a homeowner/debtor for years on a home equity line of credit (HELOC) even when the homeowner had filed bankruptcy and obtained a discharge order. Under this ruling, a bank could have up to 30 years to protect their interest and the actual line (deed of trust) was not extinguished because of the bankruptcy discharge.

When someone files bankruptcy and completes the litigation, they eventually obtain a discharge order. The bankruptcy discharge generally releases the debtor from personal liability on the debt. For example, if someone has credit card debts and they file a Chapter 7 bankruptcy and obtain a discharge, they likely never have to repay that credit card debt. This situation is different, however, when the debt they owed was actually a lien secured by a property. While people don’t think about it, credit card debt is unsecured debt, meaning its not tied to an asset such as a car or a home. A lien, however, is a debt that is tied to property via the deed of trust.

In Diaz, the homeowners alleged that they took out a HELOC in 2005 and stopped making payments in 2012. They then filed bankruptcy and obtained a discharge order in August, 2012. In 2020, the homeowners filed a quiet title action attempting to get the deed of trust released from the recorded documents so it didn’t show up on their home’s title. Generally, if a party wants to enforce a contract (such as a note and deed of trust) they must take action within 6 years of a breach. Therefore, the homeowners argued that the bank had not acted within 6 years of the bankruptcy discharge and 8 years since the last payment.

Ultimately, the Court of Appeals analyzed two issues: (1) when the 6-year statute of limitations started; and (2) the effect of the bankruptcy discharge. First, the Court held that the bank could wait until 2040 (the end of the loan) before it was required to take any action, unless it had previously demanded payment in full. The Court found that because it was a HELOC and they never demanded acceleration of the balance due, then there was no triggering event for the 6-year statute of limitations. Even though the homeowners had stopped paying in 2012, it did not bar the bank’s actions 8 to 10 to 28 years later.

The Court then turned to the effect of the bankruptcy discharge. The homeowners argued that they were protected by the bankruptcy discharge. The court first noted that a discharge protects a debtor from the underlying debt, but it does NOT extinguish a lien associated with the debt. So while the bank could not sue on the debt, it could foreclose against the home. The Court further said that the discharge also did not trigger the statute of limitations. Therefore, unless the bank had accelerated the debt, the bank could wait years before enforcing the lien.

It is important to remember that the bank had chosen not to foreclose. Had they pursued a trustee’s sale, the bank’s rights would have changed dramatically. The important thing to take away is that just because you are familiar with what you believe to be the correct rule, the law is always in the details and you should speak to an attorney before deciding how to proceed on real estate matters.

by Mark B. Zinman, Zona Law Group