Homeowners' Association Collections - Bankrupt Owner

I have advised several homeowners' associations recently who are being told by an owner that the owner's obligation to pay assessments has been discharged in bankruptcy.  The HOAs are worried about fulfilling their duty to the association's membership to collect revenues without running afoul of a bankruptcy discharge.

The most common form of bankruptcy an owner will file is a Chapter 7, which typically culminates in the owner receiving a "discharge" or release of pre-filing unsecured debts.  There are intricacies to the bankruptcy process that are outside the scope of this post, but assuming the owner still owns the property that is the subject of the assessments after filing bankruptcy, the bankruptcy will not discharge assessments coming due after the date of filing bankruptcy.  This means the HOA may still collect from the owner those assessments made after the date of the owner's bankruptcy filing.  The HOA will want to work with legal counsel to determine the timing of collection and the amount that can be collected to avoid violating bankruptcy laws.

Some owners will go into bankruptcy and, despite still holding legal title to the property in the HOA, will "walk away" from the property.  In most HOAs the fact an owner has abandoned the property will not absolve the owner of his or her obligation to pay assessments.  Likewise, it will not affect that HOA's lien for assessments.  As with all such matters, a careful review of the covenants of the HOA is the first step in pursuing a collection.

The lien on the property is usually not affected by bankruptcy, but that does not mean enforcement of the lien is the most effective means of collecting past-due assessments.  The lien will usually be subordinate to a first mortgage, so the possibility of collection through foreclosure of the lien is curtailed.  The lien is still useful to have and a notice should be recorded, as it will help ensure payment of the past-due assessments in the event of a sale.

Often the best alternative for collection is a suit directly against the owner, leaving the lien and the property out of it.  Although the owner may not have a lot of assets after the bankruptcy, the owner will also not have a lot of unsecured creditors competing for the owner's income, because they will have lost their rights in bankruptcy.  In any event, a judgment awarded after bankruptcy can survive for years and will not be subject to discharge in a future bankruptcy, because debtors are precluded from filing serial bankruptcies under existing law.

With a thoughtful approach and good legal advice, an HOA has good alternatives for collecting past-due assessments from owners who have gone through bankruptcy.  In a time when more and more people are defaulting on obligations, it is a board's duty to be aware of and to pursue the available means of collection.