January 2, 2003’s Denver Post reported that 2002 Colorado bankruptcy filings totaled 21,250, breaking 1997’s record of 19,075. Chapter 7 filings were up 13% over 2001, according to the Post. This trend is likely to continue through most if not all of 2003.
 
Many people think “Chapter 7” means all debt must be written off because the debtor has “thrown in the towel.” But even though a homeowner files a Chapter 7 bankruptcy petition, your association may still be able to collect assessments.
 
This article discusses a Chapter 7 filing. A Chapter 13 filing is the other proceeding typically filed by a homeowner. Chapter 13 Bankruptcy is the subject of an article in the October, 2002, issue of this newsletter. While both articles familiarize non-lawyers with bankruptcy as it affects association collections, bankruptcy is a complex area of the law. The best advice to an association confronted with a delinquent owner who files a Chapter 7 bankruptcy petition is to seek timely legal advice.
 
A Chapter 7 filing is referred to in the Bankruptcy Code as a “liquidation.” The debtor’s assets are sold to pay the debtor’s debts existing at the time of filing and the unsatisfied portion of the debts is wiped out. Typically, an owner's assets are either exempt under the Bankruptcy Code, or non-existent, so Chapter 7 creditors usually recover little. As discussed below, associations have the opportunity to fare better if they act promptly and with knowledge of their rights.
 
An association should, by law, receive a Notice of Bankruptcy filing when a homeowner files a Chapter 7 Petition. The first consequence of this receipt is that all efforts to collect debts owed before the filing dates must stop. The Bankruptcy Code imposes an automatic and broadly-construed stay on all such efforts. That stay remains in place until the Petition is dismissed (“thrown out”) or discharged (the debtor complies with the Bankruptcy Code and pre-Petition personal debts are wiped out) or the Bankruptcy Court lifts the stay.
 
If the Petition is dismissed, action to collect all debts may resume. However, a debtor may, and many do, immediately refile after a dismissal, reviving the stay. If the debtor complies with the Bankruptcy Code, a discharge of personal debts, including the personal obligation of the debtor to pay pre-Petition association assessments, usually results 5 to 6 months after filing. It is important to note that while the Bankruptcy Code allows repeated filings and dismissals, the Bankruptcy Code limits a debtor to one discharge every six years.  
 
Even if there is a discharge, an association’s right to collect pre-Petition assessments frequently survives a Chapter 7 proceeding. This is because the association’s right to collect assessments is enforceable against the real estate, through foreclosure, even though the association cannot look to the owner to collect the debt.

The Petition includes the debtor’s “Statement of Intentions,” which should reveal whether the debtor intends to keep the real estate located within the Association. This is key for an association, because if the debtor abandons the real estate located within the association, the association will likely lose out to a senior lienholder, typically the first mortgage, even if the association has a lien recorded against the real estate. However, if the debtor intends to keep the real estate, the association’s foreclosure rights will remain after the bankruptcy is dismissed or discharged.
 
Neither form of bankruptcy petition (7 or 13) relieves a debtor of the obligation to pay association debts incurred after the date the Petition is filed. Failure to pay post-Petition assessments allows the association to file to dismiss a Bankruptcy Petition filed under Chapter 13. Since this deprives the debtor of the protection against collection efforts afforded by the automatic stay, the association possesses a powerful tool to secure payment of post-Petition assessments, regardless of the result as to pre-Petition debt.
 
An association can mitigate the adverse effect of even a Chapter 7 Bankruptcy by being aware of its rights and obligations and by timely monitoring and action.