There is a lot to know about the basic mechanics of bankruptcy and what associations can and can’t do when an owner files for such protection. It is crucial that every association contact its attorney for direction on how and when to proceed when confronted with a delinquent owner filing for bankruptcy protection. There are three methods by which an individual can file for bankruptcy: Chapter 7, Chapter 11 and Chapter 13 of the United States Code (USC). Each of these chapters offers unique benefits and burdens to Debtors and Creditors alike such as:
• Chapter 7: Duration of Bankruptcy: Between three and six months. Benefits for Debtor: the Debtor’s personal liability relating to Pre-Petition Assessments is very likely to be extinguished in a matter of months rather than years. Benefits to the Creditor: the Creditor’s lien for Pre-Petition Assessments is likely to remain fully intact, thereby allowing the Association to foreclose on the unit owner unless the Owner satisfies the Association’s lien.
• Chapter 11: Duration of Bankruptcy: several years (varies). Benefits for Debtor: allows high-net worth individuals to reorganize their financial lives through a Bankruptcy Plan. Unlike Chapter 13 Plans, Chapter 11 Plans are generally not overseen by a Trustee. While an individual can file under Chapter 11, most don’t. Benefits to the Creditor: allows an Association holding an undersecured lien to have its claim treated as secured-in-full. Under a Chapter 11 Plan, the debtor could be forced to pay the full Pre-Petition Delinquency whereas the lien would have likely been stripped down to the present valoue of the collateral under either a Chapter 7 or 13 case.
• Chapter 13: Duration of Bankruptcy: Between three and five years. Benefits for Debtor: affords the debtor several years to stall the Association’s lien before a foreclosure action may be resumed. Benefits to the Creditor: if the debtor fails to make his or her scheduled payments to the Association, as set forth by the Chapter 13 Plan, the entire Chapter 13 case may be dismissed, thereby subjecting the owner to liability on claims held by all Pre and Post Petition Creditors.
Upon filing for bankruptcy protection under any of these chapters, a period of forebearance known as the Automatic Stay goes into effect. The Automatic Stay is an injunction that arises by operation of law, without the need for a court order, which automatically bars creditors from initiating or continuing with efforts to collect or enforce secured or unsecured debts or to enforce claims against estate property. With associations’ new statutory authority to collect rent from tenants in delinquent properties as well as to suspend certain use rights of delinquent owners, it is critical that an association discuss with counsel whether or not it is permitted to continue with such actions once a Petition for Bankruptcy Protection has been filed.
Attorneys for most associations will file a Motion for Relief from Stay in Chapter 11 and Chapter 13 filings asking the Bankruptcy Court to allow the association to proceed with its collection efforts. Once Stay Relief is granted, the Court effectively removes the collateral from the Debtor’s Bankruptcy Estate. Most Chapter 7 bankruptcies are “no asset” cases meaning the debtor will be surrendering the property, thereby placing the association in a position to foreclose and take title to the property. If the Association does take title, it will be required to write off Pre-Petition Assessments owed. Due to the shorter duration of a Chapter 7 bankruptcy, the costs involved with filing a Motion for Relief from Stay may not make sense.
The concepts discussed herein are just the “tip of the iceberg” when it comes to the complications and delays that arise when a delinquent owner in a community association files for bankruptcy protection. It is absolutely essential that associations speak with counsel experienced in the very specialized area of bankruptcy law to know what can and can’t be done with the association’s ongoing collection efforts.
This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.