Can my HOA Collect if the Homeowner Declares Bankruptcy? by Axela Tech.

Can my HOA Collect if the Homeowner Declares Bankruptcy?

by Axela Tech. / Mitch Drimmer

Bankruptcy is one of the most perplexing issues community association managers must deal with. It is the most complicated issue involved in condo and HOA collections. So YES, a condo or HOA CAN collect if a homeowner declares bankruptcy. But you must know what you are doing and how to do it.

What Is Bankruptcy?

Bankruptcy is generally taken to mean that someone is out of money. But the actual meaning, and the legal proceeding of bankruptcy, are a little more complicated. Declaring bankruptcy isn’t as simple as someone saying, “Sorry, I have no more money left,” it’s a legally determined state of being unable to pay off debts owed.

The goal of filing for and declaring bankruptcy is to create a more positive economic situation for everyone. By declaring bankruptcy, the person in debt pays off a portion of the owed debts, and the remainder is discharged, giving both sides an opportunity to benefit from a bad situation.

Certain types of debts generally can’t be discharged through bankruptcy, such as child support, alimony, student loans, and some tax obligations. However, money owed to condos and HOAs is considered consumer debt and is dischargeable when a homeowner declares bankruptcy.

What Happens When a Homeowner Declares Bankruptcy?

Bankruptcy cases are handled by federal courts, and federal law defines six different types. The two most common types used by individuals are Chapter 7 and Chapter 13, named after the sections of the federal bankruptcy code where they are described.

Chapter 7 bankruptcy, the type most individuals file, is also referred to as a straight bankruptcy or liquidation. A trustee appointed by the court can sell some of the homeowner’s property and use the proceeds to partially repay creditors, after which their debts are considered discharged. Some types of property can be exempt from liquidation, subject to certain limits. Those include vehicles, clothing, household goods, tools of the trade, pensions, and a portion of home equity. Homeowners list the property they are claiming as exempt when you file for bankruptcy.

Chapter 13 bankruptcy, on the other hand, results in a court-approved plan for the delinquent homeowner to repay all or part of their debts over a period of three to five years. Some of their debts may also be discharged. Because it does not require liquidating assets, a Chapter 13 bankruptcy can allow a homeowner to keep their home, as long as they continue to make the agreed-upon payments. Chapter 13 bankruptcy is the most common kind of bankruptcy filing by homeowners attempting to save their homes from foreclosure.

Collecting After Bankruptcy is Filed

In community associations, the registered agent (generally your manager or board president) will receive a notice that an owner has filed for bankruptcy and action must be taken. HOA and condo collections are serious business and if the association does not respond appropriately, you may not be in line to recover any delinquent assessments when the case is discharged by the bankruptcy court.

It’s incredibly important to remember that once you get notice of a bankruptcy filing, the management company CANNOT contact the owner to request payments. If you have sent the file to a collection agency or attorney, you need to notify them so that they too can stop all collections activity.

The association’s attorney will need to respond to the notice of bankruptcy with a ledger of all amounts due to the association. This is called a “pre-petition” ledger and it covers everything that was owed from the time the property owner went delinquent until the time he/she petitioned the court for protection under the bankruptcy laws. This ledger of delinquent condo or HOA dues is sometimes referred to as a ledger “in rem.”

Next, the association needs to start a new ledger which should be called the “post-petition” ledger which covers what is owed from the time the owner filed for bankruptcy going forward. The post-petition ledger has nothing to do with the bankruptcy proceedings and the delinquent owner should be paying their assessments as usual after the initial bankruptcy filing.

Many believe being in bankruptcy means nothing needs to be paid, but that is not accurate. If the association is not receiving post-petition payments, then when the bankruptcy is discharged, they need to immediately start collections activity.

If a homeowner declares bankruptcy and fails to pay the post-petition amounts (assessments and other debts owed to the association) the association can ask the bankruptcy court to lift the automatic stay and allow collection efforts to resume. If successful, the condo or HOA can continue pursuing the debt.

Monitoring After a Homeowner Declares Bankruptcy

Monitoring a bankruptcy is critically important. Axela Technologies does this for all files that are placed with us, whether they are already in bankruptcy or file during collections activity.

Often it happens that a bankruptcy has been discharged and the community association does not even know about it, so the debt keeps on piling up with no resolution in sight. Axela Technologies uses PACER which is a database of all bankruptcy cases in the United States. When a case is discharged, the association should know about it and Axela will move the file forward if the owner has not paid their post-petition amounts or does not adhere to the court’s settlement agreement.

Bankruptcy is there to help and protect people, but there are those who will game the system and will postpone payment or just completely default. These are files that need to be addressed and worked on without delay. Call Axela for a no-obligation review of our collection process and technology. Let us show you how the future collects!