Community Association Collections 101: What Happens When An Owner Files For Bankruptcy?

The collections process isn’t a fun one, and depending on what causes delinquency, it can get complicated. A homeowner who falls behind on just their association payments is one thing, but someone who’s so behind on all of their financials that they have to declare bankruptcy is a very different story. We’re asked all the time about what happens when a condo or HOA has to deal with homeowner bankruptcy. If your association is dealing with a bankrupt homeowner who is not paying their post-bankruptcy amounts, there are decisions to be made and steps that can be taken. Let’s review what must happen and how the community association can best navigate this situation.  

Bankruptcy Notice

What Happens When Bankruptcy is Filed?

Filing for bankruptcy isn’t a quick process. When a person, known as the “petitioner,” files for bankruptcy, they must file a list of their creditors with the bankruptcy court (which is a federal court). The creditors will be noticed with a “bankruptcy notification” and will be given a time frame by which to respond, usually under two months. Government claims can be submitted up to six months after the petition date (it’s good to be the government.) 

There is no requirement that the response (or proof of claim) from the creditor must be submitted to the court via an attorney, which is good for you–the less an association is required to spend on costly attorney fees, the better. This proof of claim can be submitted by the association directly, the management company, or by a collections partner like Axela. Just be sure that everything that is legally owed to the association is included on that proof of claim–this should include assessments, late fees, late interest, fines and violations, special assessments, and any other sundry items that have been charged to the property. Be sure to double-check the ledger because it is expensive to get a second bite at that apple if you find you want to amend your claim with the court.

From there, the bankruptcy court will hold a “341 meeting,” which is a meeting between the debtor and the creditors but it is not mandatory for any creditor to attend. Then comes the really complicated part.

Two Ledgers

Types of Bankruptcy

It is important to know what type of homeowner bankruptcy you are dealing with as this knowledge will direct your business decisions going forward. When a property goes bankrupt in a community association, the community needs to prepare two ledgers: a pre-petition ledger and a post-petition ledger. You cannot add the post-petition amounts to the bankruptcy claim because next month’s bills are not this month’s debts. Regardless of which kind of bankruptcy they have filed, the petitioner has an obligation to pay the post-petition amounts during the bankruptcy. If the delinquent owner is NOT paying their post-petition debts, the association needs to make a decision and take action immediately, and the type of bankruptcy will determine which steps to take 

Chapter 7

Chapter 7 bankruptcy, also known as “no-asset” bankruptcy, is a complete wipeout. This means that no money will be recovered from the pre-petition amounts.  A Chapter 7 bankruptcy case can take as little as six months to complete because there is no settlement to be made. Creditors can claim to the court that there are assets being hidden but, in most cases, it is all over fairly quickly. If the delinquent owner is not paying the post-petition amounts, then the association can wait until the case is discharged and then move forward with collections activity. If the owner has been paying their post-petition amounts, then the issue is resolved albeit the association has taken a hit. 

Complete wipeout

Chapter 13

Chapter 13 bankruptcy is known as a “wage earners plan” and is a workout where the court will make a settlement and oversee it until the payment plan has been completed. This is when the association needs to make a business decision.

In a Chapter 13 bankruptcy case, the pre-petition debts will not be discharged for 3-5 years, and the petitioner remains in bankruptcy. If they are not paying the post-petition amounts, the association cannot submit the delinquency for collections or to an attorney for foreclosure. The only course of action is for the association to ask the court for an “injunctive stay of relief” which is essentially asking the court to allow the association to move forward with collections and or foreclosure efforts.


Wage Earner;s Plan

So What Needs to Be Done?

If a unit owner files for Chapter 13 bankruptcy and is not paying their current assessments, it is not a stretch to believe that most likely they will never pay. It is unfair that the association needs to wait three to five years until the pre-petition debts are paid, the delinquent owner is discharged from bankruptcy, and the association can finally move forward. As we mentioned above, if a delinquent owner has filed for Chapter 13 bankruptcy and is not paying their current assessments, the association should file with the court a motion for injunctive relief. During the gap period, section 1519(a) of the Bankruptcy Code states that a bankruptcy court has the power to grant provisional injunctive relief and certain other forms of relief where “relief is urgently needed to protect the assets of the debtor or the interests of the creditors.” Additionally, an order staying execution against the debtor can also be granted. If a property owner is not paying their assessments, then the case can be made that a stay order is required to protect the assets (the property).

How to Handle Homeowner Bankruptcy in Your Association

The same way you’d handle any other bankruptcy situation in your association: call a professional. Homeowner bankruptcy in your association can be managed and worked through, but it takes a lot of knowledge and a lot of time. Many times, when a management company or a board of directors is reviewing delinquencies, the units that are delinquent and are also in bankruptcy get glossed over. There is a feeling that once a delinquent owner files for bankruptcy, the association has no options other than to wait until the bankruptcy is discharged. This is not the case as there are options and every case is unique. Axela Technologies has the experience, knowledge, and experience to deal with all these contingencies. Call us today for a no-cost, no-obligation analysis, and review of your delinquencies.

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