When an owner becomes delinquent on association assessments or other obligations, they may consider bankruptcy as a solution to their financial problems. A bankruptcy filing triggers a number of federal laws that affect an association’s ability to collect delinquent assessments.
Most notably, upon the filing of a bankruptcy petition, an automatic stay on collection action is imposed. This means the association must cease all collection activities, including sending letters, filing liens, and proceeding in pending collection court cases. All further collection activity must take place through the bankruptcy case instead.
There are two different types of bankruptcies that can be filed. In both cases, an officer of the court, known as a bankruptcy trustee, assists the owner in consolidating or reorganizing their debt.
In a Chapter 7 bankruptcy case, the bankruptcy trustee will look for available assets to pay outstanding creditors. If no assets are available and the creditors remain unpaid, the owner will likely seek a personal discharge of outstanding debt. This means the association would be unable to pursue a personal money judgment, wage garnishment, or bank attachment for the delinquency owed at the time of the bankruptcy filing. However, the association would still be able to pursue the recovery of that debt through foreclosure of the property and collect the community’s lost revenue from the proceeds of a sheriff’s sale.
In a Chapter 13 bankruptcy case, the bankruptcy trustee helps the owner come up with a plan to pay all outstanding debts. These debts are typically paid over a period of five years. Once all creditors file their claims to assert the amount owed, the bankruptcy trustee calculates a lump sum amount to be paid by the owner each month. When the trustee receives the monthly payment, the appropriate portion of the payment is sent to each creditor. If at any point the owner does not send their monthly payment to the trustee, the bankruptcy case can be dismissed.
In both types of cases, the owner is responsible for paying regular assessments to the association. While a bankruptcy case can provide an owner with a more streamlined way to deal with their outstanding debt, it should not result in increased delinquency by allowing the owner to continue to miss association payments. If an owner does not timely pay assessments as they become due during their pending bankruptcy case, the association could ask the court for relief from the automatic stay that has been imposed. This would allow the association to continue its collection efforts through letters, liens, and foreclosure while the bankruptcy is still pending.
Overall, while the filing of a bankruptcy petition may delay an association’s ability to take immediate action, different collection methods still exist to make the association whole.