During tough economic times, it is essential that every common interest community create and maintain an effective, efficient and aggressive collection policy to collect HOA fees, monthly maintenance fees, special assessment fees, and other condo fees for common elements, and any such policy must account for an owner’s bankruptcy.
In October of 2005, Congress extensively amended the Bankruptcy Code via a law that was known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “2005 Amendments”). The Act states that, if a bankruptcy is filed after October 17, 2005, the owner must pay post-petition fees and special assessments that are due to condominium associations, homeowners associations, cooperative corporations and any other affordable housing community with an FHA condo certification (collectively “Associations”) after the date the bankruptcy is filed. If the debtor’s bankruptcy was filed before October 17, 2005, the post-petition fees and special assessments must be paid only by debtors who occupy or rent the unit.
Prior to the 2005 Amendments, only the debts from owners who physically occupied Units in condominiums, or who collected capital contributions from paying tenants, were non-dischargeable due to bankruptcy proceedings. The 2005 Amendments eliminated these provisions, stating that, so long as a person has ownership interest in a property, they must pay post-petition arrears from unpaid or delinquent HOA fees, monthly maintenance fees, special assessment fees, and other condo fees for common elements with respect to any bankruptcy filed after October 17, 2005.
While an individual owner can file either a chapter 13 or chapter 7 bankruptcy, associations generally face chapter 13 bankruptcies, which allow owners to preserve home ownership and stall creditors, including the mortgage company and association, from collecting unpaid arrears. So long as the debtor adheres to the requirements of United States Bankruptcy law, he or she can maintain the Unit and pay the delinquent mortgage over time.
Generally, only a "secured" debt, like a mortgage, is likely to be paid via a chapter 13 bankruptcy. Associations can convert unpaid or delinquent HOA fees, monthly maintenance fees, special assessment fees, and other condo fees for common elements into “secured” debt by recording a lien on the property, increasing the likelihood that these arrears are paid in full. In addition, some bankruptcies may forgive certain debts owed by owners, increasing the possibility that there will be funds available to pay the association’s secured claims. In turn, and in relation to the obligation to pay post-petition assessments, it is imperative that associations file the appropriate papers in connection with a bankruptcy. Otherwise, the association may lose the ability to recover certain debt during a bankruptcy that would otherwise be collectable. Associations should see an owner’s bankruptcy as an opportunity, rather than an obstacle.