How The Bankruptcy Code Affects HOA Collections

By: Christopher R. Moore, Esq.

The bankruptcy code is immensely complicated, but, for homeowners associations, the important thing to know is that, if a member files bankruptcy, the association cannot take any actions to collect assessments subject to the bankruptcy case, including filing liens or civil complaints, while the case is pending or until the court issues an order lifting the “automatic stay.”  11 U.S.C. §362.  Violations of the automatic stay can result in penalties imposed by the bankruptcy court, including, at minimum, having to return money or release a lien. 

If a member receives a “discharge” (an order from the bankruptcy court legally absolving a debtor of the obligation to pay certain debts), then, for all intents and purposes, any debts subject to the discharge are no longer owed.  So, if a member has delinquent assessments going back two years, files bankruptcy, and receives a discharge, the member no longer has any legal obligation to pay those assessments.  Importantly, the debts subject to a discharge are debts in existence at the time the bankruptcy case was filed – not at the time of the discharge. As a result, if new assessments come due after the member filed, but before the discharge is entered, the member is liable for the new assessments but not for any assessments arising prior to filing.

If an association has a lien in place, it may still be able to recover the related assessments even though the member no longer legally owes the money.  This is because a lien is considered an obligation of the real estate itself – not the owner personally – so a lien can survive the discharge of the debt that gave rise to the lien.  In that scenario, the association cannot attempt to collect discharged assessments from the owner, such as by filing a civil complaint seeking a personal judgment or even by sending a letter asking for payment.  However, the association can seek to enforce the lien, such as by foreclosing, as long as the stay is no longer in effect.  A bankruptcy court can order a lien to be released, a common occurrence when the total encumbrances on the property exceed its fair value.  But, otherwise, a lien survives a bankruptcy discharge and must be paid off if the property owner wants to sell or refinance in the future (unless the lien terminates for some other reason).