Knowing the basics of bankruptcy will assist you in coordinating the appropriate response to a bankruptcy filing with the association's attorney and with the board of directors. In all cases, it is recommended that associations retain an attorney that specializes in bankruptcy law involving homeowners associations.
What to Do When Notified of a Bankruptcy
1. Request copies of any documents related to the filing such as the Notice of Bankruptcy Case Filing and/or the Petition.
2. Notify the billing department and outside collectors to immediately cease all debt collection efforts.
3. Be prepared to restore privileges that were suspended due to non-payment of assessments or other debts owed to the association.
4. Contact an attorney who specializes in bankruptcy law involving associations as soon as possible for review of the petition, filing a proof of claim, and possible other actions.
5. Advise the billing department to separate the owner's billings into pre- and post-petition accounts.
Possible Outcomes of the Bankruptcy Case
1. Dismissal. The debtor fails to follow through properly on his/her filing. As a result, the court dismisses the case. Proceed as though the bankruptcy never happened, free to collect for all amounts due. Re-combine pre-petition and post-petition accounts back into one account.
2. Discharge (Chapter 7). The debtor completes his/her filing and earns the right to a fresh start. Remaining unsecured debts are avoided and no longer enforceable (unless avoided, an assessment lien recorded pre-petition may remain enforceable, consult a bankruptcy attorney).
3. Plan Confirmed (Chapter 13). The debtor may have up to five years to pay a court-approved portion of his/her debts. If the debtor fails to complete the plan, the bankruptcy may be dismissed. If the debtor completes the plan, he/she may receive a discharge of the remaining pre-petition and post-petition assessments. (Goudelock v. Sixty-01 Ass’n, (2018), D.C. No. 2:15-cv-01413.)
The Effect of a Recorded Assessment Lien on Bankruptcy Proceedings
1. An assessment lien recorded before a bankruptcy petition changes the debt from unsecured to secured with the security being the owner's separate interest.
2. Although a debtor may receive a discharge of his/her personal liability for a debt, the creditor can still foreclose on the security unless the assessment lien is avoided by court order.
3. The amount that the creditor can claim against the security includes all pre-petition debt and, in most courts, post-petition debt as well.
4. If the security has no value beyond any liens senior to the assessment lien, the debtor can file a motion to avoid the lien. Creditor must contest the motion or lose the right to pursue the security, and may also lose the right to payment of its claim.
The initial filing of a bankruptcy petition has no effect on the association's right to collect delinquent assessments (except that the association must wait until the automatic stay is terminated). If the bankruptcy is dismissed at any point, as often occurs, the association can resume efforts to collect all amounts due.
If the association's debt is secured by an assessment lien at the time that the bankruptcy is filed, the association can pursue the security (property) even if the debtor receives a discharge. If the association's debt is unsecured, the association may still receive a substantial portion of the amounts owed through a court-approved payment plan in a Chapter 11 or 13 proceeding but only if the association files a timely proof of claim. There are several avenues to payment. The best advice is to record a lien as early as possible and consult a bankruptcy attorney.
For this article, thank you to Richard G. Witkin, Esq. of Witkin & Neal, Inc., an assessment collection company specializing in homeowner associations.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.