Lien and Personal Obligation - What's the Difference?

There is often confusion as to the difference between liens against property and the personal obligation of a homeowner. Typically, this issue arises when a homeowner files for bankruptcy. The Association needs to distinguish between the personal obligation the Association can collect from the homeowner, and the lien that attaches to the property and can be collected upon the sale of the property or by foreclosing against the homeowner.  

A Chapter 7 bankruptcy is designed to liquidate a debtor’s assets and discharge his debts. In a Chapter 7 bankruptcy, if the Court ultimately issues a discharge of the debtor, the amounts that were due prior to filing the bankruptcy petition (not the date of discharge) are no longer the personal obligation of the homeowner, but remain as a lien against the property. In other words, an Association cannot seek to recover the amounts that came due prior to the bankruptcy filing from the homeowner personally. However, a homeowner, so long as he or she remains the owner of the property, will be personally obligated for any amounts that accrued after the filing of the bankruptcy petition. While the Association cannot collect the pre-petition debt from the homeowner personally, it retains its right to collect the lien balance in the event the property is sold, refinanced, or transferred, and could also foreclose the lien.

A Chapter 13 bankruptcy filing is somewhat different in that this filing reorganizes secured debt.   There are two scenarios in a Chapter 13 bankruptcy that could affect the debt owed to the Association. Should a homeowner list his or her property located within the Association as surrendered in the bankruptcy filing, the Association would then become an unsecured creditor with regards to that property.  The homeowner’s lender would most likely then begin foreclosure proceedings. However, the lender could take more than a year to commence a foreclosure and the foreclosure, once filed, could be continued for up to a year. Therefore, the Association has the option to either wait for the lender to foreclose or seek permission from the bankruptcy court to begin its own foreclosure proceedings. On the other hand, should a homeowner retain the property, the homeowner will have to repay the amounts that were in arrears at the time of the bankruptcy filing, which is typically paid over three to five years. The homeowner will also be required to pay all of the post-petition assessments that have come due since the filing of the bankruptcy. 

 

In either case, the Association should maintain two separate ledgers; one with the post-petition debt that represents the homeowner’s personal obligation and one with the pre-petition debt. This is very helpful should the homeowner become delinquent on his or her post-petition debt so the Association can seek to collect this debt from the homeowner. It is also helpful in case the property sells and the lien need to be satisfied at closing or if the Association elects to foreclose on the property.