A friend of mine is upside down in his house. He is thinking about foreclosures and after helping for hours researching information we came across this in Arizona law:

A lender may not bring a deficiency suit against a person who lost a property that is 2.5 acres or less at a foreclosure, provided the property was a single one-family or a single two-family dwelling. This is so even if the high bid at foreclosure was less that the balance due on the loan.

Does this mean that anyone in Arizona who is caught up in the housing craze can just walk away from there homes and not worry about nothing except for a mark on their credit for 7 years. If so then everyone in a bind should do it because it will take longer than 7 years to pay off the cars and TV's they bought with the 2nd deed of trust anyway.

Thank you.

Arizona is a nondeficiency judgement state, which does mean a lender cannot go after additional assets of a home owner in the case of a foreclosure.

However, if he is foreclosed on, the entire foregiven mortgage amount is considered income by the IRS. So at the close of the foreclosure your friend (and the IRS) will receive a 1099 showing the forgiven debt. Your friend will be resonsible for paying income taxes for the mortgage amount.

I had it happen to me in Arizona in 1993. I was foreclosed on, then got smacked with a massive tax bill the next year and was forced into bankruptcy. That law still stands, although I think it is truly the stupidest tax law we have as a country.

However, a foreclosure does not completely go away after 7 years. Almost all lenders have a question on every lending application:

"Have you ever had a foreclosure?"

Note, it doesn't say within the last 7 years, but ever. In fact, many lenders will look at a potential borrower if it has been more than a few years since a foreclosure – often more than 2-3 years, but anyone who has had one is always under much more scrutiny, will almost always pay more interest than anyone who has never had a foreclosure. And, yes, before anyone comments, if you just say "No, I never had a foreclosure" and are caught, that is loan fraud, a federal crime worth up to a $500,000 fine and 10 years Federal Jail.

Your friend is much better off working out a short sale or doing a deed-in-lieu of foreclosure than doing a full foreclosure. I did a foreclosure in Arizona and I still regret having done it.