With all signs pointing to little relief regarding our current economic condition and with various scenarios suggesting a possible worsening, it is critical for associations to pay close attention to their delinquencies and minimize the amounts that must be written off as uncollectible.
 
Bankruptcies, a natural by-product of a recession, can have a significant adverse impact on write offs for associations, particularly if they are not monitored closely or if the association is unaware of its rights.
 
This article discusses a Chapter 13 bankruptcy filing. A Chapter 13 filing is typically referred to as a reorganization proceeding. This type of proceeding is available to individuals with a debt limit of less than one million dollars, of which no more than $750,000 is secured debt. (A secured debt is a debt secured by something, typically real estate, as opposed to an unsecured debt which is merely a promise to pay.)
 
A Chapter 13 homeowner debtor is usually an individual with a regular source of income, seeking to remain in possession of his or her property and is seeking to “adjust” the debt which has been acquired prior to the filing of the Chapter 13 bankruptcy. This type of filing is most beneficial to an association, as unpaid assessments are secured by property, i.e., the unit. As a secured debt, the assessment arrearage should be paid off entirely over the term of the debtor’s plan.
 
In a Chapter 13 filing, the debtor is required to file a “plan.” The plan provides the method in which the debtor intends to pay off the accumulated debt. Secured debts are usually paid off in their entirety over a specific period of time, not to exceed five years. The debtor makes monthly payments to the Chapter 13 trustee in bankruptcy, an individual who monitors compliance with the plan. The trustee makes distributions to all of the creditors in the plan.
 
If the association receives a Notice of Bankruptcy filing which states the debtor has filed a Chapter 13 Petition, a Notice of Appearance and Request for Service, together with a Proof of Claim, should be filed. The Notice of Appearance and Request for Service operate to inform the bankruptcy court and all other parties that the association wishes to be notified of any and all proceedings in this matter and to be served with all papers filed in the Chapter 13 matter.
 
The Proof of Claim establishes the amount of money which the debtor owed as of the date of the bankruptcy filing. The Proofs of Claim filed by all creditors are used to determine the total amount of the debtor’s debts. The Chapter 13 trustee then determines if the debtor has sufficient income to pay off all of these debts and allocates the proportion of the payments to be made to the creditors from the payments received from the debtor.
 
When the debtor has “listed” the association as a creditor, a Proof of Claim will automatically be sent from the bankruptcy court. However, if the association is not listed, it may not receive notice of the bankruptcy until much later.
 
If the debtor sends the association a copy of the plan, it is extremely important that it be reviewed to determine that the unpaid assessment has been “listed” as a “secured” claim. (Many debtors and their counsel are unaware of the fact that the assessments for the unpaid common area fees are secured claims.) It is of utmost importance in a Chapter 13 proceeding that the association verify that the debtor has properly listed the debt. If the debt is listed as “unsecured” the association will only receive a percentage of the amount actually owed. A formal “objection” to the plan should be filed if a review of the plan indicates the debtor has incorrectly listed the association as an unsecured creditor. Typically, upon the receipt of objection, the debtor will amend the plan to provide for the secured status of the unpaid assessments and the association will then withdraw the objection. However, if the debtor does not amend the plan, the bankruptcy court will hold a hearing to decide the issue.
 
If the debtor ceases to make payments pursuant to the approved plan, the association can file a motion to dismiss the bankruptcy with the court. If the debtor does pay the missed payments, the court will likely dismiss the bankruptcy thereby lifting the automatic stay and allowing the association to take legal action to collect the delinquency.
 
A “discharge” operates to discharge the debtor from any personal liability for debts which occurred prior to the date of his or her bankruptcy filing. As to a Chapter 13 debtor, a discharge means that the plan has been successfully completed with all creditors having been paid in accordance with the plan’s provisions.
 
Once a debtor has been discharged from bankruptcy, a creditor cannot proceed to attempt to collect any money from the debtor personally for those debts from which the debtor is now discharged. Absent extraordinary circumstances, such as fraud of the debtor in filing for bankruptcy, the discharge is a complete and final disposition as to the debt.
 
Debtors are obligated to continue to make their monthly assessment payment for each month following the filing of the bankruptcy petition. In other words, even though the assessments owed at the time of the Chapter 13 petition are going to be repaid over time pursuant to the plan, the debtor must continue to make assessment payments that come due each month after the petition was filed. Failure to make these payments can also result in the bankruptcy being dismissed by the court.
 
In the unlikely event that an association fails to take proper action to protect itself upon receipt of notice of a Chapter 7 or Chapter 13 bankruptcy filing, all is not lost. The lien itself for the unpaid assessments remains on the unit, passes through bankruptcy and remains undischarged. Therefore, it is possible, after receiving relief from the automatic stay or after discharge of the debtor, to proceed to take action against the unit itself (and not against the owner by way of a judicial foreclosure), in order to collect the unpaid assessments. However, with a little bit of planning and attention to notices which come in from either the unit owner or the bankruptcy court, an association should be able to collect the amounts owed without the necessity of proceeding to take action against the unit itself.