Associations and Unit Bankruptcy

With so many foreclosures that are still sitting out there on the horizon, and the economy continues to stagnate, there continues to be a large number of people who are filing for bankruptcy. I get questions from condominium and homeowner’s associations as to what they can do when they receive bankruptcy paperwork in the mail that concerns one of their owners. The first thing to know is that all collection actions must stop (including foreclosure actions) while the bankruptcy is in front of the court, unless the court says otherwise.

When the bankruptcy petition paperwork is filed with the court, a snapshot of the filer’s assets are taken on that day. In the case of condo associations and HOAs, they should be named as a creditor and the amount owed on the date of the filing should be what is shown on the paperwork as being owed. If it is not (for example they only list 3 months of back assessments, not the current months as well as late fees) a filing must be made with the court that the bankruptcy is being filed in, on behalf of the association to correct the amount owed. That amount owed will be worked into a payment plan that will begin upon completion of the bankruptcy filing and approval of the bankruptcy plan by the court. Now keep in mind that it could take several months (around 4-6 months) for the bankruptcy to be completed by the courts and that the payment plan will typically be somewhere along the lines of a minimum of 3 years.

For the most part, once the bankruptcy is filed with the court, the homeowner is responsible to continue paying the assessments beginning with the next assessment that comes due. In some instances, a homeowner will make a payment or two, but then not meet their responsibility to make the current assessment payments. Unfortunately for associations, there is not really a solution that makes sense financially if the payments stop since many properties are underwater with their equity. You can petition the court to lift the stay and then either continue or begin a foreclosure proceeding, but most times, it will be costly and there is no guarantee the judge will allow it, so it may cost the association more money that it might not recover. Please also note that there can be different situations and rules if the property in question is the homestead property of the person filing bankruptcy.

As with most situations, there is no one size fits all answer for an association’s unit that is in bankruptcy. Not only must the legal issues be weighed, but also the financial aspects. An association would not want to spend more money in costs and attorney fees that would be greater than a few years worth of assessments if there is a good chance they will not recover most of those expenses.

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