When a homeowner is delinquent in assessment payments files for protection under the federal Bankruptcy Act, many people understand that the homeowner will likely be relieved of debt-repayment obligations. But even though a homeowner files a bankruptcy petition, your association may still be able to collect assessments.

This article discusses personal bankruptcy, generally. Two articles in this newsletter, in October 2002 and March 2003 focused on the two forms of personal bankruptcy most often encountered: Chapter 13 and Chapter 7, respectively. 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 bankruptcy petition is to seek timely legal advice.

An association should by law receive a Notice of Bankruptcy filing when a homeowner files a Bankruptcy 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 for failure to comply with the Bankruptcy Code’s requirements, 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 a Chapter-7 filing. Chapter 13 filings, while often dismissed before completion, typically go on for two or three years. It is important to note that while the Bankruptcy Code allows repeated filings and dismissals, the Bankruptcy Code limits a Chapter-7 debtor to one discharge every six years.

Notwithstanding a discharge, an association’s right to collect pre-Petition assessments frequently survives a Bankruptcy proceeding. This is because the association’s right to collect assessments is enforceable against the real estate, through foreclosure, as well as against an individual debtor.

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.

A Bankruptcy Petition does not relieve 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. 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.