The Importance of the "Notice of Bankruptcy"
When an Association receives a Notice of Bankruptcy from the Bankruptcy Court, the Association should pay close attention to this document. This Notice is very important to the Association's ability to collect pre-petition debt.
The Notice of Bankruptcy is important when a homeowner files for Chapter 7 bankruptcy in that it gives an Association notice of a bankruptcy proceeding so as to prevent any attempts at collection from that homeowner while the case is proceeding. In addition, the Notice serves as a notification to the Association that should the homeowner receive a discharge from the bankruptcy court, any pre-petition debt accrued by that homeowner has to be “written-off” or discharged by the Association. In other words, the homeowner’s debt prior to the date of filing the Chapter 7 bankruptcy petition becomes uncollectable by the Association as it is no longer a “personal obligation” of the homeowner. The Association can, of course, maintain a lien for any pre-petition and post petition debt that has come due while the owner holds title to the property. It is recommended that the Association maintain a separate ledger containing the amounts owed prior to the filing of the bankruptcy in order to ensure that all collection efforts by the Association, its manager or attorney properly account for the personal obligation of an owner.
The Notice of Bankruptcy is also very important when a homeowner files for Chapter 13 bankruptcy. Timely acting on a Notice of Chapter 13 Bankruptcy can be the difference between an Association being able to collect pre-petition assessments or having to write-off such debt.
In a Chapter 13 bankruptcy, if an Association would like to collect debt accrued by a homeowner prior to the filing of the Chapter 13 petition, the Association must file a Proof of Claim with the Court giving the Court notice of its “creditor” status. In addition, when a homeowner files a Chapter 13 bankruptcy, the homeowner is required to file a “Plan” which addresses how the homeowner plans to pay certain debts, including pre-petition assessments. If the homeowner does not include the Association in his or her Plan, the Association can file an Objection to the Plan. This is where the importance of paying close attention to a Notice of Bankruptcy comes into play. The Notice of Bankruptcy outlines specific deadlines for the filing of different documents with the Court. Therefore, should the Association fail to acknowledge the Notice of Bankruptcy and its deadlines, or fail to notify its manager or attorney of such bankruptcy filing, it could ultimately prove to be very damaging to the Association’s right to collect pre-petition assessments.
If you have any questions regarding a Notice of Bankruptcy that your Association has received, or other matters related to the filing of a bankruptcy by a homeowner, please contact us at (303) 863-1870.