Your doorbell rings and you open the door to find a stranger with a handful of papers standing in front of you. Next you hear the chilling words “you’ve been served”. Nobody likes being served with a lawsuit. It’s perfectly normal to feel panicked and worried. If you had stopped making payments on a credit card because you could no longer afford to do so, the lawsuit may not come as a big surprise.
So, what now? Upon receiving service of a summons and complaint for a claim on an unpaid debt like a credit card, you have two options: 1) timely file an answer with the court defending the lawsuit; or 2) do nothing and allow the creditor to obtain a judgment by default. The possible legal defenses available for an unpaid debt are fairly limited. Are you legally responsible for the debt? Did you default on payments? Is the amount alleged in the complaint accurate? Did you first fail to make a full, agreed-to minimum monthly payment on the debt fewer than six years prior to the lawsuit? If the answer to these questions is “yes”, then you may not have a meritorious defense to the lawsuit in Arizona.
Six years is the statute of limitations, in other words the deadline, for suing on a credit card debt in Arizona. If more than six years have passed between the date you first failed to make a full, agreed-to minimum monthly payment on the debt and the date the lawsuit was filed, then you have an affirmative defense that should be raised in an answer filed with the court. A valid statute of limitations defense normally prevents a creditor from prevailing in a lawsuit on a debt.
In situations where an answer to the complaint is filed, the court determines whether the party being sued, called the defendant, is liable for a valid and enforceable debt. The court does not evaluate the defendant’s financial situation, or consider whether he or she has the financial means to pay the judgment. Furthermore, the court does not get involved in settlement negotiations between the parties to the lawsuit. If the court finds in favor of the plaintiff, it will enter a “judgment” against the defendant.
If you decide not to answer the complaint, and after your deadline to file an answer has expired, the plaintiff will normally submit default paperwork to the court. The default paperwork tells the court that you have not responded to the lawsuit within the required time frame, and requests that the court proceed with entering a judgment against you. Once the court enters a judgment, the plaintiff acquires all the collection rights of a judgment creditor.
A judgment creditor has a number of options for collecting on the judgment in Arizona. If you are employed, the judgment creditor is likely to garnish your wages. This is accomplished by obtaining a writ of garnishment from the court and serving it on your employer. Arizona law permits a judgment creditor to garnish 25 percent of your net paycheck; the remaining 75 percent is exempt and yours to keep. You may request a hearing before the judge to ask for a reduction of the percentage from 25 percent to 15 percent. In Arizona, the judge has discretion to reduce the garnishment amount to 15 percent of your net paycheck, which is the bare minimum. In general, such reductions are liberally granted, but it is important to be prepared with proof of your income and living expenses at the hearing.
A judgment creditor may also garnish bank accounts in your name. The judgment creditor obtains a writ of garnishment from the court and serves it on the financial institution where you have an account. You do not receive any advance notice of the garnishment, and learn about it only after the funds have already been frozen. In Arizona, $300.00 of the funds in a checking or savings account is “exempt”, or protected. For married couples with a joint account, a total of $600.00 is exempt. As an example, if you are an unmarried individual with a $1,000.00 checking account balance, the judgment creditor would get $700.00. Qualified retirement accounts, such as IRA’s, are exempt from judgment creditors. In Arizona, it is possible for a judgment creditor to simultaneously garnish your wages and bank accounts.
A notable difference between wage garnishments and bank account garnishments is that a wage garnishment is a continuing lien. This means that the non-exempt portions of your earnings (25 percent, or 15 percent if reduced) will be deducted from every paycheck until the judgment is satisfied. Once the judgment creditor serves the writ of garnishment, your employer is required to comply for as long as you remain an employee. Conversely, a bank account garnishment is not a continuing lien on your bank account. Upon serving your financial institution with a writ of garnishment, a judgment creditor collects the non-exempt portion of the funds in the account on that date. If the judgment creditor wants to repeat the process, it is necessary to obtain and serve a subsequent writ of garnishment. Because a bank account garnishment is generally a “hit or miss” proposition, judgment creditors normally favor wage garnishments when the debtor is employed. That said, it is possible for a judgment creditor to garnish wages and garnish bank accounts at the same time.
Generally speaking, a judgment entered in Arizona is enforceable within ten years after the date of entry (specific types of judgments may be subject to different renewal requirements). An Arizona judgment cannot be enforced after the expiration of ten years from the date it was entered, unless the judgment was renewed by affidavit or process, or an action was brought on it within the ten year period. Please note that the judgment renewal period was recently increased from five to ten years in Arizona, effective August 3, 2018. Only judgments entered or renewed on or after August 2, 2013 are subject to the new legislation.
In Arizona, judgment creditors typically renew their judgments using the affidavit method. To renew a judgment by affidavit, the judgment creditor must file an affidavit setting forth the information required by A.R.S. § 12-1612(B) “within ninety days preceding the expiration of ten years from the date of entry of such judgment”. A renewal affidavit filed more than ninety days before the judgment expires is ineffective, as it must be filed within the ninety day period to be a valid renewal. There is no limit on the number of times a judgment can be renewed, and therefore a judgment can remain enforceable indefinitely. Unfortunately, this means that a judgment can haunt you for a lifetime unless you satisfy the judgment, or obtain a bankruptcy discharge on the debt.
In Arizona, judgment creditors usually record their judgments with the local county recorder’s office. For example, a judgment entered in a Maricopa County court would normally be recorded with the Maricopa County Recorder. Once recorded, the judgment becomes a lien on any non-exempt real property, and the judgment creditor may satisfy the judgment by executing on non-exempt real property owned or later acquired by the judgment debtor.
If you are worried about your house, the good news is that a recorded judgment does not become a lien on homestead property in Arizona. This issue has been litigated in both the Arizona state courts and federal bankruptcy courts, and the Arizona Court of Appeals recently revisited it again in a case called Pacific Western Bank v. Castleton. In the Pacific Western Bank case, the judgment creditor argued that its recorded judgment attached as a lien to the debtor’s homestead because the equity in the property exceeded the $150,000 Arizona homestead exemption. The Arizona Court of Appeals held that, although the creditor could satisfy its judgment by forcing an execution sale when there is excess equity in the property, a judgment lien still does not attach to a homestead.
To summarize, as long as the equity in the house you live in does not exceed the $150,000 Arizona homestead exemption, a recorded judgment does not attach as a lien and a judgment creditor cannot sell your house to collect on the judgment. Even when the equity in your house does exceed $150,000, there is no attachment of a judgment lien because the whole homestead is protected. However, when there is excess equity in your house above the $150,000 homestead exemption, it is possible for a judgment creditor with a recorded judgment to force an execution sale of the house.
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