Collecting Assessments — The Wall Street Journal

The Wall Street Journal is noticing the quandary faced by many associations who find themselves faced with owners who won’t or can’t pay their bills, and lenders who won’t do anything about it.  Today’s article reports on a new Florida law which makes it easier for homeowner associations to collect rent from tenants in delinquent units, and intercept that rent that would otherwise go to the defaulting owner.  Utah has a similar provision, which was repealed and reenacted in the 2011 Utah legislature as part of Senate Bill 167; that same bill also makes provisions which may make it more feasible for associations to “non-judicially foreclose” against unit owners who are in default.

Assessment collections are, of course, of critical importance to Utah condominiums and HOA’s, so we’ll be discussing these new changes — and whether and how they can help Utah associations, at our seminar at Daybreak this Saturday, at the City Creek Center on June 7, and in Park City on June 11.  And, based upon requests that we have received, we’ll likely be presenting the seminar on other dates in June as well.

So, register here for one of the sessions.  And if you can’t make one of them, subscribe to this blog, so that you’ll be certain to hear of, and perhaps even help to choose the dates and times for, other sessions.

The Collection of Post-Bankruptcy Petition Assessments

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.

News on Reverse Foreclosures

My Twitterpal Melissa Garcia, (@ColoradoHOAGal) pointed me to this article in the Miami Herald, which  explains the mechanics of a typical reverse foreclosure.  Reverse foreclosures are being pursued by community associations throughout the country, as associations find themselves stuck with units on which the owners will not pay and on which the lenders will not foreclose.  The problem arises everywhere, but particularly in those states with higher foreclosure rates.

A condominium or homeowners association (HOA) that forecloses a unit upon which there is a senior lien will not be able to take title, but will be able to get access to the unit, and presumably put some pressure on the lender to step up to its obligations.  The law is still developing in this area, so watch for new developments as some cases are decided.

The article also quotes another frequent blogger and twitterer, Donna Berger, (@CondoandHOALaw); Donna wisely recommends that associations rent the units after taking them from the banks.

CCAL Seminar — Collecting Assessments

Terry A. Kessler, Esq.; Michael S. Karpoff, Esq. and David C. Swedelson, Esq. are the speakers for this session.
A topic being addressed for the third time in this session is assessment recovery; once again, attorneys here are stating that they’re seeing clients take their collections to other firms and other resources (such as collection agencies).
Needless to say, everyone is reminiscing about the good old days, when less than 1% of the matters were going to sale; now it’s probably 20%.  In California, they’re starting to see some of the units get picked up at the sale.
Terry Kessler is an advocate of judicial foreclosure from New Jersey.  Judicial foreclosures were taking 6 to 9 months; now it’s taking from 8 to 12 months, and sometimes up to two years, to finish the judicial process.
Ms. Kessler also advocates the pursuit of rent from tenants where possible, even where the lender is foreclosing its lien.  In Utah, specific statutory provisions facilitate the association’s ability to demand rent from tenants.  Hence if your association has rental units, the occupancy of a unit should be considered as an aspect of the collection plan.

Abandoned…


Monday’s New York Times had an article on the continued (and apparently increasing) tendency of lenders to walk from properties, rather than foreclose on them.

This article, however, reveals a new twist to the problem: the owners, who think their homes have been foreclosed, are being charged by municipalities for the clean up, and sometimes the demolition of, these residences. So it’s not just community associations that are facing non-responsive lenders, but also the owners of those units. Previous posts on this blog have advocated vigilance in the monitoring of units in this day and age; this gives another reason. And just because a lender threatens foreclosure, don’t assume it will be completed.

Mortgage Cram-Down Update

Last night, the U.S. House of Representatives passed H.R. 1106, allowing for bankruptcy court intervention in renegotiating the terms of certain mortgages. The bill does not directly refer to association’s, but CAI’s Public Affairs team was (and is) encouraging community association leaders to follow the legislation, and share your concerns about the potential of interference with community association assessments. Here’s a snippet of the info sent from CAI this morning:

On Thursday, March 5, the House of Representatives passed HR 1106 with some technical amendments by a vote of 234 to 191. Although the concerns raised by CAI and others have not yet been fully resolved, your efforts in expressing concern have helped us get Congress’s attention, and members of the Judiciary Committee have committed to work with us to clarify and address these issues.

CAI continues to have concerns that the legislation will have a negative impact on associations in states with priority assessment liens, and that the grant of authority to bankruptcy courts, absent clearer direction and limitations, may be used to modify a homeowner’s assessment obligations to his/her community association. Again, thanks to your efforts, Congress is now aware of these issues and we will continue to work with legislators as the bill moves into the Senate.

Your efforts will help us ensure that this legislation will not have negative unintended consequences for common interest communities across the country and the residents who are current in their assessments. A well-crafted plan, that helps those in distress while protecting those who are current, will benefit us all.

I’ll post updates here on this blog, and on the www.utahcondolaw.com parent page, and on our new collection site, www.caalrs.com

You Think Your Association Has Problem Owners?

A New York cooperative isn’t unique among community associations in having to pursue collection against one of its tenants, Courtney Love, but the amount being pursued is a bit higher than I’m used to. Her $18,000 lien wasn’t paid, so attorneys decided to pursue another $5,611.10.

Because she still didn’t pay, the association, as of the last reporting, had filed a lien for $122,594.35.

Oh yeah, and then there are those other issues, also published by the Smoking Gun, which resulted in a threatened lawsuit.