News no one wants to hear: A delinquent owner’s property is being foreclosed and has filed for bankruptcy.
Here’s what you need to know about protecting your HOA:
The first thing you need to do is find out more about the filing. Your association’s response to the situation depends on the chapter the owner files under. Typically, you’ll see chapter 7 or 13.
Chapter 7 Bankruptcy:
Bankruptcies usually resolve in three or four months and there’s not a whole lot your association can do about it once the process has started. The owner’s assets will be liquidated and they’ll get relief from their personal liability for their debts.
If a delinquent owner files for Chapter 7 protection and your HOA hasn’t previously filed a lien, it will be classified as and unsecured creditor. Unfortunately this means that the owner will be discharged of that obligation and your right to collect the debt is extinguished.
However, if your HOA filed a lien prior to the owner declaring bankruptcy, you become a secured creditor. Theoretically, this means you are in line to be paid back through the liquidation of the owner’s assets.
We’ve talked before about collecting debt. The above situation is why we recommend filing a lien when owners become delinquent. It’s simply about protecting the association in the event of bankruptcy.
In should be noted that some states provide automatic liens for HOA debt, but even in those states, many attorneys recommend you still file a lien to put the rest of the world on notice that the property is encumbered by the owners’ debt.
Chapter 13 bankruptcy:
Under this filing, the owner is seeking protection while they try to pay back their debt over time.
However, it’s still in your HOA’s best interest to secure a lien. While you may not be able to collect from the owner personally, you may be able collect at closing if the owners later decide to sell the property. A lien also protects your association if the owners suffer a foreclosure.
Some states give HOAs a lien for six months worth of dues even if the mortgage company forecloses.
The bottom line:
In the event of delinquency, file a lien! It won’t guarantee payment but the likelihood increases drastically.
The most important thing your HOA can do happens even before this. Have a written, and very public policy for delinquencies and stick to it. Make clear that there are no favorites or special circumstances. After all these are your neighbors and likely friends were talking about. Having an official policy in place makes it clear that it’s not personal.
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