Bankruptcy Types

Owners of units/lots sometimes do not pay their assessments and file bankruptcy There are two types of bankruptcies that can affect community associations:

Chapter 7 Bankruptcy

Chapter 7 the owner liquidates his or her non-exempt assets and pays outstanding creditors with available funds. Their debts are then discharged and the HOA cannot pursue the debtor for any unpaid pre-petition debts. Exempt property will usually include cars, work-related tools, and most household furnishings. Not all chapter 7 filings are valid and may be subject to challenge by the HOA. In these situations, the owner could be forced into a Chapter 13, which gives the HOA a better chance of recovering its delinquent assessments. In addition, HOA's can hold the unit/lot owner personally responsible for any post-petition assessments until ownership of the unit is transferred Chapter.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, allows individuals to reorganize their debts, Debtors are allowed three to five years over which to pay their debts. The debtor retains ownership and possession of his or her property, but must allocate some portion of their income to repaying his or her pre-petition assessments and often other debts. If the HOA's assessments are secured by a lien, it will generally be entitled to receive greater payment than unsecured creditors.

When owners file for bankruptcy, by law, an automatic stay is imposed. This means that all collection activities by the association against the owner must immediately stop. While the automatic stay is in effect, the HOA cannot do any of the following:

  • Record a lien against the delinquent owner's unit/lot,
  • Foreclose on an existing lien,
  • File a lawsuit against the owner or threaten to sue,
  • Continue an existing lawsuit against the delinquent owner.
  • Make any demands for unpaid fees, fines or assessments.
  • Suspend the owner's privileges, or
  • Garnish wages,

 

Duration of Automatic Stay

The automatic stay continues until one of the following occurs:

  1. Relief from Stay. If the owner does not pay post-petition assessments to the association while continuing to own or occupy the unit, the association can seek permission to pursue post-petition assessments. This is done by means of a motion for relief from the automatic stay. If the court grants the motion, the association can then take action to recover delinquent post-petition assessments.
  2. Dismissal. Bankruptcy courts will dismiss a homeowner's petition if he/she fails to submit required information or documents to the court. When an owner's bankruptcy claim is dismissed, the association can re-start collection efforts on all delinquent assessments.
  3. Discharge.A discharge occurs when the bankruptcy case has been completed and the delinquent owner's debts have been eliminated (Chapter 7) or reorganized (Chapter 13). Once the case is discharged, the association can pursue any unpaid post-petition assessments owned by the homeowner.

The duration of the automatic stay is also affected by multiple filings. If a delinquent owner had a bankruptcy case dismissed within the last year, the automatic stay lasts 30 days (unless extended by the court upon motion of the debtor). If the owner had more than one bankruptcy dismissed in the past year, the automatic stay does not go into effect at all (unless imposed by the court upon motion of the debtor).

Proof of Claim

Associations can protect their claims by filing a "Proof of Claim" with the bankruptcy court. Once an association learns of an owner's bankruptcy, it has a limited time to file a Proof of Claim with the Court. Claims filed after the deadline may be denied.

Post-Petition Assessments

Once an owner files a bankruptcy petition, his/her debts are divided into "pre-petition" debts (those incurred prior to the filing of the petition) and "post-petition" debts (those incurred after the filing). Only pre-petition debts are protected by a bankruptcy filing. An owner who files for bankruptcy remains responsible for all post-petition dues and assessments unless there is a transfer in title. (In re Montalvo (Bankr MD FI 2016) 546 BR 880.)

Lien Secures HOA Claim

The board has a duty not only to manage the association, but to oversee the collection of assessments from owners. Assessments are necessary for the operation of the association. Without them, the board cannot pay insurance premiums, utility bills. employee salaries, maintain the property, or contribute to reserves. To protect the association, boards must timely record liens against delinquent owners. A lien secures the association's claim with a "hard asset," the unit. If there is equity in the property, the association has priority over unsecured creditors and has a better chance of recovering its claim.

Pre-Petition Liens

A bankruptcy can erase an owner's personal obligation to pay pre-petition assessments to the association, thereby preventing the association from pursuing those debts against the owner. If that occurs, the board has no choice but to write off the amounts as bad debt. That is not the case if the board recorded a lien prior to the bankruptcy filing. Because assessment liens are recorded against the property, they are nondischargeable in bankruptcy. In re Whitten (Bankr D Mass 1996) 192 BR 15, King v. Cherrywood Residents Ass'n (In re King) (Bankr D Md 1997) 208 BR 376. This means an association could eventually collect the monies owed if and when the property is sold by the owner (provided the bank does not foreclose ahead of the association).

Recommendation

Boards should immediately cease all collection efforts against a delinquent owner and seek legal counsel whenever that owner files for bankruptcy.

 

 

 

Pacific Association Collections

818-991-5200