How Bankruptcy Affects Assessment Collection – Article by Sean D. Allen
So, your Association has a homeowner who is delinquent on his assessments. Before you are able to make any progress on collection and before a lien is recorded, you receive notice that he has filed for bankruptcy. What happens next?
The moment a debtor files for bankruptcy, an “automatic stay” is imposed. The automatic stay prevents creditors from taking any action to collect from a debtor. This is intended to give the debtor some breathing room and allow him to clearly evaluate his financial position without having to fend off creditors. Therefore, all collection efforts must cease until the automatic stay is either lifted or terminated.
The filing of a bankruptcy will only have an effect on the assessments incurred up to the date that the bankruptcy petition is filed. The debtor remains responsible for paying any debts arising after the bankruptcy petition is filed. Those debts are called “post-petition” debts. Therefore, after your delinquent homeowner files for bankruptcy, he is still required to pay assessments from the date his bankruptcy is filed forward. If he fails to pay those amounts, the Association can make a motion with the Bankruptcy Court for relief from the automatic stay, allowing the Association to proceed and collect on the post-petition assessments. Regardless, once the bankruptcy is discharged and the case is closed, the automatic stay will be terminated and Association will then be free to pursue the homeowner for his post-petition debts.
There are two types of bankruptcies Associations need to be generally aware of. A Chapter 7 bankruptcy provides for a straight liquidation of the debtor’s assets. This means that the debtor’s non-exempt property will be sold and the proceeds of that sale will be distributed to the debtor’s creditors in their order of priority. Any remaining unsecured debts are then discharged. This, of course, requires that the debtor’s property have some value. If, however, a sale of the debtor’s property would not generate sufficient proceeds, or if the debtor does not own any non-exempt property, then the debts may still be discharged in a “no asset” bankruptcy. If a homeowner files a Chapter 7 bankruptcy and receives a discharge, the Association will likely not be able to collect upon any of the debts which arose prior to the filing of the bankruptcy petition. However, the homeowner’s obligation to pay post-petition assessments will be unaffected by the discharge. The Association can attempt to collect any “post-petition” debts once the bankruptcy is discharged or the automatic stay is lifted.
Conversely, in a Chapter 13 bankruptcy individuals who have regular income are able to develop a plan to repay all or part of their debts over a period of time in lieu of liquidating their assets. A typical Chapter 13 repayment plan lasts approximately three to five years. Any debts remaining at the end of the plan are then discharged. In a Chapter 13 bankruptcy, the Association may be able to collect on the pre-petition debt through the repayment plan. In order to protect their rights to this debt, the Association should file a Proof of Claim detailing all of the debt owed to the Association up to the time the bankruptcy was filed. Whether the Association will be able to collect on their unsecured debt depends upon whether the homeowner has money remaining once the secured debts are paid under the plan. Once all of the payments under the plan are made, the bankruptcy case will be closed, the automatic stay will be terminated, and the Association will then be free to pursue any post-petition debts.
Of course, this all assumes that the Association has not recorded a lien against the homeowner’s property for the unpaid assessments. By recording a lien, the Association’s debt then becomes “secured” by the property (for more information regarding secured lien priority, follow this link). Secured debts are generally not subject to discharge in bankruptcy and the repayment of secured debts is given priority in a bankruptcy. Therefore, the best way for an Association to protect their right to collect on a delinquent homeowner is to promptly record an assessment lien as soon as possible. This also has the benefit of giving the Association the opportunity to foreclose on the lien if the debts remain unpaid.
For more on bankruptcy, follow this link.
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