QUESTION: Can the entirety of a special assessment be dismissed if the owner files bankruptcy? Does the association have any recourse?
ANSWER: It depends on how the special assessment is levied and whether the association filed a lien. If the association failed to record a lien when the owner became delinquent and if the entire assessment was levied at once rather than over time, the owner's responsibility for the debt could be completely discharged in bankruptcy. That means the association cannot pursue the owner for the unpaid debt.
However, if the association recorded an assessment lien on the unit before the owner filed for bankruptcy, an interesting anomaly occurs--the bankruptcy may eliminate the owner’s obligation to pay the association but the lien remains valid. That's because the duty to pay assessments is both personal to the individual and separately attaches to the unit when a lien is recorded and is nondischargeable in bankruptcy. In re Whitten (Bankr D Mass 1996) 192 BR 15; King v. Cherrywood Ressidents Ass'n (In re King) (Bankr D Md 1997) 208 BR 376. As a result, the association can leave the lien in place until the debt is paid (provided the bank does not foreclose on the unit).
Post Petition Debts. An owner’s bankruptcy only affects assessments levied prior to the date of filing. Anything levied afterward remains valid.
Recommendation: Boards need to protect the association's interests by adopting a proper assessment collection policy and recording assessment liens against delinquent owners at the earliest possible date.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.