Chapter 7 Bankruptcy and your Association
A homeowner files bankruptcy, now what? First and foremost, all collection activity must stop in accordance with the Automatic Stay until the case is dismissed, an Order for Relief from Stay is granted, or the debtor receives a discharge. Second, the association must determine what type of bankruptcy has been filed. Individuals commonly file for bankruptcy protection under Chapter 7 or Chapter 13, and the type of bankruptcy will determine what steps an association must take to protect its interests. In this article, we will look at Chapter 7 bankruptcy.
Chapter 7 bankruptcy is the "liquidation" bankruptcy where most debts are discharged without requiring the debtor to make any payments. The term "liquidation" refers to the power of the bankruptcy trustee to take the debtor's assets, sell them, and apply the proceeds to the debts. However, the Bankruptcy Code and Colorado Law provide many exemptions to debtors to protect certain property from liquidation. Quite often, there will be no assets available for liquidation so the debtors will not receive anything from the bankruptcy estate. A debtor in a Chapter 7 bankruptcy will usually receive a discharge within four to six months after filing their petition. As stated above, once a discharge is granted, the automatic stay is lifted and the Association may proceed with collection activity. The question is: what can the Association collect?
Bankruptcy Courts have held that a debtor is liable for post-petition assessments. In other words, any HOA assessments that come due after the date of filing are collectable. Many Courts have held this liability terminates if the debtor surrenders the property to the Bankruptcy Estate. However, under the new bankruptcy law, the liability remains "for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lotů." Therefore, if the unit is being foreclosed, the homeowner may still be personally liable for the assessments from the date they filed bankruptcy through the end of the owner's redemption. Additionally, the Association may pro-rate the amount owed for the period in which the end of redemption period occurs. For example, if a homeowner files bankruptcy on October 4 and the monthly assessment was due on October 1, and the end of the owner's redemption period is on March 10 of the following year, the association may collect assessments against the homeowner for the entire months of November through February and for 10 days in March.
In addition to the personal liability for post-petition assessments, the lien for pre-petition assessment continues to run with the land. Should a foreclosure occur, that lien is extinguished except for the six month "super lien". However, if there is no foreclosure, that lien remains on the property. Thus, the association may still be able to collect the pre-petition assessments. This may be done by holding onto the lien until the property is sold or refinanced, or by foreclosing the lien.
It is not settled as to whether late fees or interest can continue to accrue on this pre-petition debt. One argument is that interest, if provided by the governing documents, continues to accrue. However, if the owner is current on post-petition assessments and his or her liability for pre-petition assessments has been discharged, late fees may not be appropriate. Late fees may also not make sense if the association is charging late fees on the pre-petition assessments and the owner becomes delinquent on the post-petition assessments, because double billing could occur. Again, there is no definitive case law on this issue.
In short, there are times when the association may need to write off bad debt due to a bankruptcy, but not always. There may be unique facts that change the scenario of an "average" bankruptcy. This article is a general overview of the association's rights in an effort to ensure the association receives all that they are entitled to. Should you have questions regarding a particular case or the general process, contact your attorney.