Homeowners' associations need HOA assessments to function. This means that when a homeowner becomes delinquent, the association could have problems. And when an owner files for bankruptcy, the association becomes one of their creditors.
What happens next depends on the type of bankruptcy being filed. An owner may be filing either chapter 7 or chapter 13 bankruptcy. In rare cases, especially if they own a home business, they may file chapter 11.
The main difference is between chapter 7 and the other two. Chapter 7 is "straight" bankruptcy - the debtor surrenders their assets to eliminate unsecured debts. In the other two, the goal is to restructure the debt so it can be paid over a longer period of time. Chapter 13 is generally an attempt to save a home from foreclosure.
In Chapter 7, all assets that are not exempt are sold. The person's primary residence is exempt - so if their property is a secondary residence or vacation home, it will be sold and the proceeds used to pay debts - these debts may include any unpaid assessments. If it is their primary residence they will likely try to keep it - with the caveat that the association has a lien and may foreclose.
If the owner surrenders the house, then they will no longer be liable for unpaid dues up to the filing date - the association should recover this from the sale of the home in ideal circumstances. However, as long as they retain title, they are still liable for dues. Because of this, some owners may choose to sell the home before they file. In the case of Chapter 13 bankruptcy, lawyers recommend that the owner make sure the dues are fully covered in their Chapter 13 plan. Some courts do allow post bankruptcy assessments to be discharged if the person filing for Chapter 13 chooses to surrender the home - but the lien is still in place. Some courts also consider HOA liens to be statutory liens, which allows the assessment to be stripped down because it "impairs their equity."
The homeowner association may be able to recoup those dues by suing the owner - but from the associations' perspective they should remember that somebody filing for bankruptcy, by definition, does not generally have the money to pay. Associations should be particularly careful about assessing legal fees and charges against a bankrupt owner, as bankruptcy courts may decide to set aside any they consider unfair. Ideally, the association should enter into negotiation with the owner, even before bankruptcy is officially filed. If somebody has unpaid dues, it is always better to talk to them before foreclosure (incidentally, if they file for bankruptcy after the association forecloses, the foreclosure will be put on stay as will any other collection attempts until the bankruptcy is completed). If somebody is considering bankruptcy, be honest with them about the effect on unpaid assessments. If they are selecting a Chapter 13 bankruptcy, then the dues will likely become part of their Chapter 13 repayment plan. Generally, it's better to be somewhat flexible for the sake of the association's reputation and attracting new residents. However, if a large amount of money is owed, bankruptcy does not protect the owner from foreclosure, only delays it if it has already been started. If you have taken title in a foreclosure, bankruptcy does not allow the owner to reclaim their home.
If the person surrenders their home, then you may have the option of purchasing the property for rent or resale.
When a resident is in serious financial trouble, you may have no option but to foreclose. However, it is often better to work with them, especially if they are filing Chapter 13 bankruptcy and attempting to come up with a plan to repay their debts.
Staff Writer
Mary Arnold, CMCA®, AMS®
