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Collecting Assessments When an Owner Files for Bankruptcy

Lerch, Early & Brewer's Community Association Update

An owner lives in your community association - Delinquent Danny. Danny’s been behind on his assessments for many years, owing $10,000. Your association has been unsuccessful in its attempts to collect from Danny. Then, suddenly, Danny contacts the association with the news that he has filed for bankruptcy. Now what?

The moment a debtor files for bankruptcy, an “automatic stay” is imposed. An automatic stay prevents creditors from taking any action to collect a debt. For example, when the automatic stay is in effect, the association cannot legally send collection letters and/or take any action against delinquent owners. All collection efforts are frozen until the automatic stay is lifted or terminated. However, even during a bankruptcy case, the debtor is responsible for paying any debts arising after the bankruptcy was filed. Those debts are called “post-petition” debts. This means that even after Delinquent Danny files for bankruptcy, he is still required to pay assessments from the date he files bankruptcy forward. If Danny fails to pay those amounts, the association can request that the Court “lift the automatic stay” thereby allowing the association to proceed and collect the post-petition balance. Of course, once the bankruptcy case ends the association can pursue that “post-petition” debt.

There are two types of bankruptcies available to individuals, a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. When a delinquent owner files for bankruptcy, a community association’s probability of collecting generally depends on whether the bankruptcy is filed under Chapter 7 or Chapter 13 of the Bankruptcy Code, and, then in the case of a Chapter 13 case, whether the debt is secured (usually by a recorded lien) or unsecured. Chapter 7 provides for "liquidation” of the debtor’s assets- the sale of the debtor's property and the distribution of the proceeds to creditors. A Chapter 13 enables individuals who have a regular income to develop a plan to repay all or part of their debts over a period of time.

If Danny filed a Chapter 7 bankruptcy and receives a discharge, it is unlikely that the association will be able to collect any pre-petition debts. In this case, all of Danny’s debts covered by the bankruptcy filing will be discharged, meaning Danny will have no obligation to repay the debts arising before the bankruptcy was filed. Danny’s obligation to pay post-petition assessments remains unaffected by the discharge, i.e., once the bankruptcy case has closed, the automatic stay terminates, and the association can attempt to collect any “post-petition” debts.

If Danny filed for Chapter 13 bankruptcy, the association will probably be able to collect on the full secured “pre-petition” debt, which generally is paid over the course of five years. During the bankruptcy case, the association must file a proof of claim claiming all of the debt owed up to the time the bankruptcy was filed. The proof of claim will detail the secured and unsecured amounts owed to the association. The secured amounts are those covered by an association’s lien. Whether the association will be able to collect on any unsecured debt depends upon whether Danny has money left over once the secured debts are paid. This is unlikely. Once Danny has made all the payments on his plan, any remaining debts will likely be discharged. As in a Chapter 7 case, after the bankruptcy case is closed, the automatic stay will be terminated, and the association can pursue any “post-petition” debts.

As you can see, it is crucial for associations to attempt to collect from delinquent owners before the delinquency gets too deep. Most importantly, in order to have any chance of recovery for “pre-petition” debts, the association must secure the debt with a lien. By staying on top of delinquencies and securing debts, the association may avoid a greater loss. 
 

For more information about collecting community association assessments, contact the Community Associations group.

This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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