Robert L. Tankel, P.A.

Bankruptcy FAQ

If a delinquent owner files bankruptcy, should the association automatically write off the debt?

No. The mere act of filing for bankruptcy does not relieve the homeowner of his or her debts. The filing of bankruptcy does, however, affect an association's ability to take legal action to enforce its collection rights. Depending upon the type of bankruptcy the owner files, the owner may pay the association under a court-approved payment plan. In almost all cases, the delinquent owner will be obligated to pay all assessments which become due after the bankruptcy filing. If a delinquent owner receives a "discharge", he or she will be relieved from the obligation to pay assessments which became due prior to the date the owner filed bankruptcy (the "pre-petition assessments"). The discharge, however, does not affect the association's assessment lien against the owner's unit or property or the debtor's obligation to pay assessments which became due after the date the owner filed bankruptcy (the "post-petition assessments"). The association can still foreclose this lien if the pre-petition or post-petition assessments are not paid even if the owner receives a discharge. Many debtor's attorneys do not understand the effect of a discharge.

If a delinquent owner files bankruptcy, can the association terminate utilities to the owner's unit?

No. A bankruptcy automatically stays (halts or prevents) any further collection action against the debtor or against the debtor's property. The automatic stay also prevents any threat to take collection action such as the threat to terminate utilities. In a Chapter 13 bankruptcy, a bankruptcy also automatically stays further collection action or threats against the debtor's spouse. A violation of the automatic stay may subject the association to sanctions by the bankruptcy court.

Does the association have any chance of collecting assessments if the owner files a Chapter 7 bankruptcy?

Maybe. The chance of collecting assessments in a Chapter 7 bankruptcy is not as good as in a Chapter 13 bankruptcy proceeding. A Chapter 7 bankruptcy is known as a "liquidation". In other words, the debtor liquidates or sells all of his or her assets to satisfy his debts. In most cases, there are not sufficient assets to satisfy the debtor's obligations to creditors. The typical Chapter 7 involves a debtor who turns over his or her property to the Chapter 7 trustee, who takes over control and possession of the debtor's property. The trustee will then typically abandon the debtor's property to the creditors. Once the debtor's property is abandoned, any creditor with an interest in the property may then take collection action against the property. Usually this means foreclosure of the first mortgage by the first mortgagee. The rarer case is where the debtor retains the property, continues to pay his or her mortgage and pays the assessments. Each account should be evaluated on an individual basis to determine the viability of collection efforts for that particular situation.

What are the association's chances of collecting assessments if the owner files a Chapter 13 bankruptcy?

Good. A Chapter 13 bankruptcy, also known as a "wage earners repayment plan", should, in most cases (although there are no guarantees), eventually result in an association recouping all past-due assessments, as well as collecting current amounts as they come due. Under a Chapter 13 bankruptcy, the debtor sets up a payment plan administered through the bankruptcy trustee. The payment plan is designed to allow the debtor to pay off all secured, pre-petition debts (those debts incurred prior to the date of bankruptcy) over a three to five year period. Once the plan is approved by the court, the trustee will begin disbursing payments to secured creditors in the order of priority (tax liens and administrative claims are paid first). Subsequent to the court's approval of the payment plan, the association should begin receiving periodic payments from the trustee. These payments from the trustee must be applied towards the pre-petition assessments and not to the post-petition assessments. The association should also begin receiving payments directly from the debtor. These payments should be applied towards the post-petition assessments. Once the plan is completed, the association should be paid in full, typically with interest.
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If a delinquent owner files bankruptcy, are they required to keep current on assessments?

Generally, yes. An owner filing bankruptcy is required to keep current on all post-petition assessments as long as he or she has an ownership interest in the Property.

When can the association expect to begin receiving payments after an owner files bankruptcy?

Even though an owner files for bankruptcy, the owner is still required to timely pay any assessments which become due after the date of the bankruptcy filing (the "post-petition assessments"). The association is entitled to receive post-petition assessments as they become due. With respect to the assessments which became due prior to the date of bankruptcy filing (the "pre-petition assessments"), the time period of when the association should expect to begin receiving payments, if at all, will depend on whether the owner filed Chapter 7 or a Chapter 13 bankruptcy petition. If the owner filed a Chapter 7 bankruptcy petition, the association should not expect to receive any payments towards the pre-petition assessments. If the owner filed a Chapter 13 bankruptcy proceeding, the association should expect to begin receiving payments from the Chapter 13 trustee to be applied to the pre-petition assessments as soon as the Chapter 13 plan is approved by the bankruptcy court and the debtor begins making payments into the plan. Generally, a plan is not approved for several months after the date the bankruptcy petition is filed. In some cases, it may take up to a year before a plan is approved.

What can an association do if the debtor does not keep current on the payment of assessments coming due after filing for bankruptcy?

If a debtor fails to stay current on assessments coming due after the date of the filing of bankruptcy (the "post-petition assessments"), the association can ask the bankruptcy court to lift the automatic stay in order to allow it to continue with collection activity. This request is made by a written motion usually entitled a "Motion to Lift Stay". The court will conduct a hearing on the motion, unless the motion is unopposed or unless the parties can agree to a resolution of the post-petition delinquency. Because bankruptcy courts are courts of equity, the bankruptcy court judges will typically not lift the stay unless the debtor is at least six (6) months delinquent in the payment of post-petition assessments. Even then, the bankruptcy court judge will typically allow a debtor an opportunity to cure post-petition delinquencies before lifting the stay. Given this, I generally attempt to reach an agreement whereby the automatic stay is modified to allow the association to foreclose without further bankruptcy court approval if the debtor defaults under a court-approved payment plan. This court-approved payment plan is set forth in a document entitled "Agreed Order."

How many times can an owner file bankruptcy?

There is no specific limit to the number of times an owner may file bankruptcy. Under the new bankruptcy laws (see above), however, a debtor who receives a discharge in a Chapter 7 bankruptcy must wait another 8 years (extended from 6 years) before he or she may receive a discharge in another Chapter 7 bankruptcy. For debtors who received a discharge in a Chapter 13, the new law requires a 2 year waiting period before the debtor may re-file for bankruptcy. There is a 3 year waiting period for re-filing for debtors who receive a discharge in a Chapter 7 bankruptcy. I often see debtors make repeated bankruptcy filings, typically immediately preceding a scheduled foreclosure sale. Many times these debtors have no intention of carrying out the terms of their bankruptcy obligations. Invariably, a debtor's bankruptcy is dismissed, which allows creditors to restart collection action. Under the new bankruptcy laws, the automatic stay terminates 30 days after the bankruptcy is filed if the debtor's prior bankruptcy was dismissed within one year of the current case. If the debtor's filed for bankruptcy on 2 prior occasions which resulted in dismissals within one year of the current filing, the automatic stay will not apply at all. These new provisions should discourage debtors from filing bankruptcy with no true intention of carrying out the terms of their repayment plans. In addition, if a debtor repeatedly files bankruptcy and fails to comply with the bankruptcy requirements, the trustee or a creditor may ask the court to dismiss the bankruptcy "with prejudice". If a bankruptcy is dismissed with prejudice, the debtor will be prevented from re-filing bankruptcy for a period of time, usually 180 days. This will give creditors sufficient time to foreclose their liens if they so choose.

Can the association restart collection if the debtor's bankruptcy has been dismissed?

Yes. Normal collection action can continue. If a long period has passed since the association last took collection action, it may be wise to resend a demand letter, revise the lien or take other collection action before proceeding with foreclosure. Upon dismissal, I will restart the account on our on-line system at the point I believe is appropriate for that particular account.

What can the association do if the debtor's bankruptcy is discharged?

If the debtor still owns the unit or lot, the association can pursue foreclosure of its lien. Keep in mind that a discharge only relieves the debtor of the personal obligation to pay the assessments, but does not extinguish the association's assessment lien. While the association cannot demand payment of assessments which have been discharged in bankruptcy, it can pursue foreclosure of its lien. Upon receipt of a discharge, I will reset the account on the on-line system back to the beginning stage of collection. If you would like for us to proceed with collection action, you will be prompted to authorize us to send a demand letter.