Upcoming Changes in Bankruptcy Law

In the current economic climate, community associations have no choice but to deal with bankruptcies being filed by homeowners who are often delinquent in their assessment payments to the association.

The bankruptcy code governing such filings can be cumbersome and confusing. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("Act") was enacted on April 20, 2005. The Act makes substantial changes to the Bankruptcy Code and other bankruptcy-related statutes. With certain specified exceptions, the Act's provisions become effective on October 17, 2005. The Act will have at least one effect on community associations. Currently, 11 U.S.C. 523(a)(16) of the bankruptcy code provides generally that a bankruptcy discharge does not discharge debts incurred by the owner for a fee or assessment with respect to the debtor's interest in a dwelling unit that has condominium or cooperative housing corporation ownership, but only if such fee or assessment is due after the bankruptcy was filed and continuing during the period which

(A)the debtor physically occupied a dwelling unit in the condominium or cooperative; or
(B)the debtor rented the dwelling unit to a tenant and received payments from the tenant for such period.

In its current form, the bankruptcy code provides that a condominium unit owner (as opposed to a townhouse owner or single family unit owner) may physically abandon his property and thereby relieve himself from the obligation to pay post-petition assessments to the association from the date of abandonment.

Said another way, after discharge of the bankruptcy, normally the debtor would be liable for all assessments that have accrued since the date of filing bankruptcy. The current bankruptcy code contains an exception for condominium owners and provides that a physical abandonment relieves the owner from the obligation of paying assessments upon vacating the condominium unit so long as he is not receiving payments from a tenant.

The Act has changed this frequently overlooked section of the bankruptcy code. The Act broadens the scope of the exemption by providing that a discharge does not discharge assessments becoming due after the filing of the bankruptcy petition with respect to the debtor's interest in a unit of a condominium, cooperative, corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot.

In short, the Act now provides that, no matter what type of unit the debtor may own, if the debtor relinquishes "possessory ownership interest," the debtor will not be liable for assessments that become due after relinquishing such interest. The exception is no longer limited to condominiums and cooperatives, and the requirement relating to receiving payments from a tenant have been removed.

Board members and managers need not take any affirmative steps relating to this particular change in the law other than to be aware that it exists and to keep an eye on units whose owners have filed bankruptcy for possible physical abandonment.

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