Associations, Bankruptcies, and Non-Dischargeability
September 9, 2013
Assessments are the lifeblood of any association. The money coming in through assessments is what pays to maintain and repair the common areas and common elements for which the association is responsible. These assessments are to be paid by owners of lots and units in the development. Sometimes these owners experience economic difficulties. One of the remedies these owners often turn to in times of economic strife is bankruptcy. Western Tennessee has one of the higher rates of bankruptcy per capita in the nation. Consequently, we are seeing the issue of bankruptcy crop up more and more in representing associations. Bankruptcies are frustrating for the homeowner, for the association, and for us.
Essentially a bankruptcy is a federal debt relief procedure by which a debtor declares that he cannot repay his debts. He can either enter into a long-term repayment plan administered by a trustee appointed by the court or have his assets liquidated by a court to satisfy and discharge his debts. In either event, once a bankruptcy is properly declared, any creditor is stayed from collecting on a debt absent a court order. This means that the creditor, including the association, cannot file a lien, file suit, or foreclose, absent approval from the bankruptcy court.
In 2005 bankruptcy law was changed. The changes provided that certain debts would be non-dischargeable in bankruptcy. This means that the debtor would still be liable for the debts despite successfully completing a bankruptcy. Homeowners association and condominium association assessments were included were included as a non-dischargeable debt. Pursuant to 11 U.S.C. § 523(a)(16), a fee or assessment, that becomes due and payable after the order for relief, to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot shall not be dischargeable. This means that any assessment or fee that becomes due after the date of filing of the bankruptcy is non-dischargeable. For example, John Doe owes an association $1000.00 as of the date of filing in his bankruptcy. The on-going assessment is $100.00/month. The $1000.00 is dischargeable. The on-going assessment (and any late fees) of $100.00/month is not dischargeable. If the on-going assessment is not paid, then once the debtor is discharged from bankruptcy, the association may proceed to collect all of the non-discharged assessments. As for the assessment subject to discharge, it depends on the case.
This has led to an interesting situation. In many cases, a debtor will surrender his property in bankruptcy. This means they will move out of their home and mail the keys to the lender. But, there has never been a legal conveyance of the property. In other words, no deed conveying the property has been executed and accepted. Absent the legal conveyance, the debtor is still on the hook for the on-going assessments from the filing of the bankruptcy. The bank does not want to foreclose because of the cost, expense, and requirement that it pay on-going assessments. The bankruptcy code provides that the debtor is responsible for these assessments. Further, a well-written CCRs or Master Deed will provide that such delinquency will be the personal obligation of the debtor and a lien on the property.
As you can see, bankruptcy issues related to assessments can become quite complex. Should your association have questions on this matter, it should contact a qualified attorney to discuss such issues.
Tags: assessments, association, bankruptcy, board of directors, bylaws, CCRs, condominium, condominium association, condominium unit, Declaration of Covenants Conditions and Restrictions, HOA, homeowner, homeowner association, homeowners, homeowners association, laws, Master Deed, non-dischargeable, non-profit corporation, nondischargeable, Tennessee