RealManage Insight

The Impact of Bankruptcy on HOAs

by Benjamin Yaeger on Jun 24, 2021 10:00:00 AM

Bankruptcy is a tool that corporate entities and individuals may use to restructure or escape certain debts. A corporation or an individual may file for bankruptcy as frequently as every eight years. 

A homeowners association, or HOA, is funded by homeowners in the community. The residents pay a monthly fee, and the money is used to run the association much like a business. Unfortunately, this means that when a homeowner becomes delinquent, the HOA could have problems. And when owners file for bankruptcy, the association becomes one of their creditors. 

What happens next will depend on the type of bankruptcy being filed. Since bankruptcy is usually a challenging concept to comprehend, it's prudent for homeowner association representatives to consult with a reputable HOA law firm to get a firm understanding of how a resident's bankruptcy filing will impact the community. 

Types of Bankruptcy Filing 

The most common types of bankruptcy available to homeowners are Chapter 13 and Chapter 7. However, rarely will homeowners file for Chapter 11 bankruptcy, especially if they own a home business. 

The main difference in these types of bankruptcy filing is that, in Chapter 7, the owner surrenders their assets to get rid of unsecured debts. In Chapters 11 and 13, the goal is to reorganize the debt to be settled over a longer timeframe. Chapter 13 bankruptcy is often an attempt to salvage a home from foreclosure.  

Chapter 7 Bankruptcy

When homeowners file for Chapter 7 bankruptcy, their liability to pay outstanding HOA fees will immensely depend on the time of filing their case and whether they're surrendering their home during the proceedings or not. 

If they intend to keep their property after completing bankruptcy proceedings, they should continue paying their homeowner association dues, including outstanding dues. 

However, if a homeowner surrenders their home as part of the bankruptcy proceedings, they may likely still be expected to pay some HOA fees. Because of this, some residents may choose to sell their homes before they file. When a person files for bankruptcy, they will be exempted from paying any dues that are amassed before their filing date.

Chapter 13 Bankruptcy

If a resident files for Chapter 13 bankruptcy, the way the association will handle their fees will slightly vary. Unlike Chapter 7 filing, in Chapter 13 bankruptcy, post-filing fees assessed by the association are dischargeable. 

A homeowner association may file a proof of claim during a bankruptcy proceeding, requesting them to cover other expenses as well as their attorney's fees. Depending on state and local regulations, a homeowner may dispute these charges in Chapter 13 bankruptcy. 

Bottom Line

Homeowner associations should be particularly careful about assessing charges and legal fees against a bankrupt owner because bankruptcy courts may choose to disregard any they consider unfair. Ideally, the HOA should enter into a negotiation with the owner, especially before filing for bankruptcy. 

If someone has unpaid dues, it's always advisable that you talk to them before foreclosure- if they file for bankruptcy after the HOA forecloses, the foreclosure will be put on hold as well as any other attempts until the completion of the bankruptcy. If someone is considered bankrupt, be honest with them about the consequences of unpaid assessments. 

Generally, it's advisable to consult with an HOA management company when a resident has filed for bankruptcy, or any other type of legal action has been initiated that may likely affect the homeowner association and the community.

RealManage is an HOA and Condo management company that focuses on safeguarding HOA's interests. We're proud to partner with communities across several states, including North Carolina, Colorado, Florida, Texas, Illinois, Washington, and California. We possess the expertise and skills necessary to help HOAs navigate the intricate world of bankruptcy filing as well as other legal maneuvers. 

To learn more about our company and how we can be of help to your community, Contact Us today!


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