*Asked & Answered
Asked – Our HOA Board of Directors has been advised that a homeowner who is delinquent in their payment of assessments has filed bankruptcy. If the homeowner obtains a bankruptcy discharge does the HOA have to write off the delinquent account as a bad debt?
Answered – Not necessarily. While a homeowner declaring bankruptcy affords them various protections from creditors attempting to collect debts, such as the imposition of an automatic stay, the Association is not necessarily without recourse if the Homeowner achieves a discharge.
The most common two (2) types of bankruptcy actions that may impact an HOA’s collection of delinquent assessments are Chapter 7 (liquidation) and Chapter 13 (repayment plans). Each type of bankruptcy filing has varying attributes that may uniquely apply to an HOA.
Regardless of which type of bankruptcy a homeowner files, the Association should immediately split their account into two (2) pre-petition debts (i.e. those that occurred before the bankruptcy filing) and post-petition debts (those accrue after the filing). This is an important action because a discharge can only relieve a homeowner of the personal obligation to pay the pre-petition debts. However, the homeowner would still be obligated to pay the HOA all post-petition debts. (See 11 U.S.C. § 523(a)(16).)
For a homeowner who achieves a discharge of the homeowner’s personal obligation to repay pre-petition debts, a discharge would not affect the HOA’s assessment lien or judgment lien with the right of judicial foreclosure that was recorded prior to the bankruptcy filing. Because the liens are recorded against the homeowner’s property, they are non-dischargeable in the bankruptcy case. As a result, once the homeowner achieves the discharge, the HOA can still proceed with foreclosure of the property and satisfy the delinquency through that mechanism. This may also incentivize the homeowner to enter into a reaffirmation agreement to voluntarily repay the pre-petition debts to avoid foreclosure of the HOA’s lien.
Considering the foregoing, it is incumbent on all Boards to ensure that they secure a homeowner’s debt through an assessment lien to ensure, among other reasons, that the HOA still has recourse against a homeowner who declares bankruptcy and obtains a discharge.
|Contact your HOA attorney to conduct an in-depth analysis of the specific bankruptcy case to determine how the HOAs interests will be best served, including the filing of proof(s) of claim to receive disbursements under the active bankruptcy plan.
-Blog post authored by TLG Attorney, Corey L. Todd, Esq.