If you are like most folks that bought homes in Arizona in 2004, 2005, and part of 2006 with little money down, you may be upside down.  What I mean by upside down is that a buyer owes more than the value of the home.  The Tucson Association of Realtors have stated that home prices in the Tucson Metropolitan area has decreased by 16% in 2008.  Now some areas were worse than others.

Folks can handle being upside down if they don't have a life changing event that decreases their income.  But, we all know that in this economy jobs have been lost.  Some places have asked workers to take pay cuts and reduced overtime.  And there are some other life changes that affect the ability to for someone to continue to pay their mortgage.  Life changing events such as illness, divorce, bankruptcy, death of a spouse, etc.

Thanks to the foresight of some of our legislators there is possibly some protection to folks that get foreclosed on from a deficiency judgment.  Now, this is Arizona law and many states do not afford this protection. 

A deficiency judgment  would be a judgment issued by a court of law after a foreclosure that would require the borrower to pay the lender the difference between the proceeds of the Trustee's sale and what was owed on the home.  Right now in Arizona, that could be a big chunk of change.

The State of Arizona  Revised Statutes prohibits a deficiency judgement on any trust deed if the property is 2 1/2 acres or less in size and is used as a single-family or two-family dwelling.

With so many foreclosures in Arizona, the prohibition on deficiency judgements have become of great interest to borrowers and also lenders.  Case law in Arizona has upheld the prohibition on deficiency judgements.  However, as with law there always is a loop hole or gray area. 

Recently the Arizona Association of Realtors published an article outlining the case law and has identifed one area that is gray.  That gray area is when someone has taken out a loan (purchase money loan) and then refinanced said loan and with it borrows funds in addition to the remaining balance may or may not be covered by the anti-deficiency statutes.  This determination will possibly be decided in court someday.

So the advice here is, whether or not you are in the gray area is to seek legal and tax advice from a lawyer experianced in Arizona Real Estate Law.