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A resident of our community, who owes
several thousand dollars in unpaid common area dues, just declared bankruptcy.
What can we do?
Don’t despair. All is not lost either literally or figuratively. In fact, if you’re in
Massachusetts or Rhode Island, you don’t even have to sweat this very much because under state law, the condo has an automatic lien for unpaid condominium fees. (Note that I said an automatic lien, not an automatic priority lien, which is different.) Thus, the association is a secured creditor in the bankruptcy case, which typically means—but does not guarantee—that unpaid fees will eventually be recouped. In New Hampshire, your association is a secured creditor only if there is a lien on record prior to the bankruptcy filing.
A bankruptcy filing triggers an
“automatic stay,” requiring all creditors to immediately halt any debt
collection efforts. So, if your board or management company receives notice of
an owner’s bankruptcy case, the first thing you should do is notify counsel.
You should also cease any collection efforts you have begun and you should not
begin any new ones. Even seemingly innocuous actions, like sending the owner a
ledger showing his/her balance, can be construed as an attempt to collect the
debt. All communication with this owner, including (and especially) any
collection efforts, should be handled by counsel.
If your attorney has been handling a lien enforcement
case, that case will immediately be put on hold. If a court date is pending, that date is effectively cancelled. If a
foreclosure sale has been scheduled, it will have to be postponed at a minimum,
but it will most likely be cancelled outright.
What happens next depends on whether
the owner is seeking to eliminate all debts under Chapter 7 of the Bankruptcy
Code, or to restructure them under Chapter 13. A Chapter 7 filing eliminates
the owner’s obligation to pay most outstanding debts, but it doesn’t eliminate
the claims of secured creditors on the amounts owed to them. Under this
bankruptcy process, the owners’ assets, often including the condo unit itself,
will be liquidated and the proceeds distributed among the secured creditors.
Typically, a Chapter 7 case will play out like this
The owner receives a discharge for his
personal obligations in the bankruptcy case. The bankruptcy case will then be
dismissed, which allows the condo to resume lien enforcement efforts and seek
to recoup the outstanding amount in the ordinary course from the lender, who
will foreclose on the unit.
Sometimes an owner will attempt to
retain the condo unit, in which case, he/she will be required to pay the entire
amount of the arrearage.
Under Chapter 13, instead of
liquidating his/her assets, a debtor retains ownership of at least some of them
through a court-approved plan that requires repayment of the amounts owed,
usually over a five-year period. As with a Chapter 7 filing, the association
will usually recover the delinquent sums, but the recovery period will take
longer.
In a Chapter 13, the unit owner must
pay whatever is owed as of the time he/she files for bankruptcy over the period
specified in the bankruptcy plan.
Simultaneously, that owner must also
stay current with regular monthly fees or any supplemental assessment that
comes due. In the long run, the association will be made whole.
If the owner fails to make the
payments required under the Chapter 13 plan, or fails to remain current on
post-petition payments, the association can file a motion seeking the court’s
permission to resume collection actions including, if necessary, foreclosing on
the owner’s unit. This is called obtaining “relief from stay.” By obtaining
relief and resuming the lien enforcement process, your attorney can ensure the
condo recovers all or most of what is owed.
Note that the association cannot
assess late fees on the pre-petition delinquency balance; that amount is frozen
once the bankruptcy petition is filed. But the association can assess penalties
on late payments for condo fees and other assessments levied after the filing.
The association can also assess fines for violations occurring after the
bankruptcy filing.
None of this will happen quickly – or
as quickly as the association might like. But when dealing with the bankruptcy
process patience is a necessity – and it will be rewarded.
Dean Lennon is a partner in the firm of
Marcus, Errico, Emmer & Brooks P.C., concentrating his practice on the
general representation of condo and HOA boards in Massachusetts, New Hampshire
and Rhode Island. Dean can be contacted
at dlennon@meeb.com.
