Many homeowners who file bankruptcy are under the mistaken impression that they have no legal obligation to pay ongoing homeowner’s assessments while the bankruptcy case is still open. Unpaid assessments and ongoing assessments are secured by the unit owned by the debtor, so long as there is sufficient value in the unit to cover the amount owed to prior lienholders and the assessments.
If the value of the prior liens against the property exceeds the value of the property, however, under Utah law, the homeowners’ assessments that predate the bankruptcy petition may become unsecured and will be either discharged under a Chapter 7 or paid a percentage of the amounts owed pro rata with other unsecured creditors.
The Bankruptcy Code, however, makes it clear that homeowner’s assessments that come due after the date of the filing of the petition commencing the bankruptcy case are not discharged in the bankruptcy and remain personal debts of the debtor who holds title to the property and for which the debtor is responsible.
Section 523(a)(16) specifically provides:
“A discharge….does not discharge an individual debtor from any debt –
(16) for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.
In most cases under Chapter 13, this issue should not present a problem. If the debtor wants to keep the home and the Chapter 13 Plan does not provide for payment of the ongoing post petition assessments, the homeowner’s association can object to the confirmation of the Plan and require the debtor to provide for the payment of the post-petition assessments. A letter from the attorney for the association to the attorney for the debtor may be sufficient to remind the debtor of his or her post-petition obligations. In some instances, however, a written Objection will need to be filed with the bankruptcy court. The reminder should be sent early in the bankruptcy so as to prevent the debtor from accruing an insurmountable post-petition past due amount.
However, if the case is one under Chapter 7 and/or the debtor has chosen to turn the home back to the bank, the question becomes one of cost. Generally, in these instances, the purchase money bank or prior lienholder will obtain relief from the automatic stay and proceed with a foreclosure, and, under Utah law, foreclose the lien of the homeowners association. With no collateral securing the association lien, the association is left with only a collection action against the debtor personally for assessments that became due after the filing of the petition. When the property is sold, the purchaser at the foreclosure sale will become responsible for the assessments, but the debtor remains personally liable for assessments between the date of the filing of the petition and the date the title is transferred from the debtor.
It is not clear whether a bankruptcy court order is required to pursue collection of post-petition assessments, while the bankruptcy case is still open. The bankruptcy code prohibits only collection action against debtors for pre-petition debts. In a Chapter 7, the association need only wait for discharge to proceed with a collection action. However, in a Chapter 13, post-petition collection action may involve action against the post-petition wages of the debtor that are property of the bankruptcy estate. That would indicate that an association should obtain an order from the bankruptcy court granting relief from the automatic stay allowing the collection action to proceed. In the Bankruptcy Court for the State of Utah, there is a filing fee of $150.00 for a Motion for Relief from the Automatic Stay. Additionally attorney’s fees will be incurred in pursuing the Motion. Although the filing fee and the attorney’s fees are usually recoverable costs under most Declarations, the debtor probably doesn’t have anything against which to collect.