You just received a notice from a homeowner that they have filed for bankruptcy. The matter is quickly turned over to the association’s attorney together with an updated account ledger to ensure that the requisite paperwork is timely filed to protect the association’s interest. How does a manager or board properly account for assessments and fees which come due after the filing of the bankruptcy? Unfortunately, this is an issue faced by managers and boards on a regular basis.
In both a Chapter 7 and 13 bankruptcy, the association has a claim, secured by its statutory lien, for all assessments, interest, late fees, attorneys fees and other charges permitted by the governing documents coming due prior to the filing of the bankruptcy. With few exceptions, this lien remains in place notwithstanding the outcome of the bankruptcy. It is important to properly account for this lien, together with assessments coming due after a bankruptcy is filed, to ensure that the debt is timely and efficiently collected.
The Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, if a proof of claim has been filed by the association, the debtor is required to repay the amount owed the association at the time of the filing of the bankruptcy petition, usually over a period of three to five years. The debtor will further be required to make his or her monthly assessment payments to the association on a timely basis. While the bankruptcy is pending, the association should be receiving two payments: (1) an installment payment from the bankruptcy trustee for the pre-bankruptcy arrearages and (2) a payment from the debtor for the monthly assessment. It is, therefore, helpful for an association to maintain two ledgers, one containing the amount of the debt owed prior to the filing of the bankruptcy and, another, setting forth all assessments coming due following the bankruptcy.
If a debtor fails to make a payment in any given month, the association’s attorney can request that the trustee move to dismiss the bankruptcy or request relief from the automatic stay, thereby permitting the association to proceed against the owner or commence a judicial foreclosure notwithstanding the bankruptcy. This is a very powerful tool since it often results in the debtor bringing his/her assessment payments current to avoid the dismissal of the bankruptcy and one which ensures that the association is paid in full at the conclusion of the Chapter 13 bankruptcy.
Although it may be a source of inconvenience for associations or managers, maintaining separate ledgers enables us to quickly and accurately identify the source(s) of non-payment and take prompt legal action to cause the debtor to remedy the default.
The Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, if a discharge is granted to a debtor, all amounts owed to the association on the date of filing of the Chapter 7 bankruptcy must be “written-off” as the personal obligation of the homeowner. However, the association still has a statutory lien for pre-petition amounts owed and all amounts coming due after the filing of the Chapter 7 petition. It is recommended that the association maintain a separate ledger containing the amounts owed prior to the filing of the bankruptcy. This will ensure that all collection efforts by the association, its manager or attorney properly account for the personal obligation of an owner and the amount which is solely secured by the association’s lien.
How about that Lien?
Following the discharge of a debtor in a Chapter 7 bankruptcy, we are often requested to provide an opinion on whether the association should maintain its lien for pre-bankruptcy assessments. Our answer, unequivocally, is that the association should maintain its lien until it has been paid in full or extinguished by a public trustee foreclosure or tax sale. The association should, of course, continue accounting for the lien on a separate ledger to assist with collecting the full amount owed.
Some compelling reasons for maintaining the lien are as follows:
- The owner may attempt in the future to sell his/her unit or obtain the refinancing of a mortgage.
- The amount secured by the lien may be utilized as additional leverage by an association when attempting to negotiate a short sale.
- The unit may, in the future, increase in value, providing a sufficient “equity cushion” to permit the association to initiate a foreclosure to collect the amounts secured by the lien.
- The owner may become solvent and commence paying their monthly assessments. If the association’s collection policy so permits, once a bankruptcy has been discharged or dismissed, payments may first be applied towards the prior arrearages secured by the lien and finally towards the personal obligation of the owner.
If your association would like to update its collection policy to address bankruptcy issues, or other matters relating to delinquent accounts, please contact one of our attorneys, or our Client Relations Representative, Kate Ellis, at firstname.lastname@example.org for assistance.