How Bankruptcy Affects An Association's Ability To Collect Assessments And Enforce Rules

When an owner files a petition for bankruptcy protection, an automatic stay immediately halts all actions by creditors from collection activities. The automatic stay begins at the moment the bankruptcy petition is filed and continues until a creditor receives an order for relief from stay from the bankruptcy court or until the case is discharged and fully administered.

A bankruptcy discharge releases a debtor from personal liability for certain debts. This means that the debtor is no longer legally required to pay the debts that are discharged. Further, the discharge acts as a permanent order prohibiting creditors from taking collections action on a discharged debt. There are some exceptions, for example, when a debt is secured by a valid lien.

Most debts are dischargeable, except certain taxes, government-backed student loans, and child and/or spousal support.

The discharge will not affect an Association’s pre-petition lien for unpaid assessments that has been attached to the owner’s property. Additionally, the Association is still entitled to the unpaid post-petition balance owed after discharge.

A bankruptcy discharge effectively blocks any further action by an Association to collect on the debt accumulated after the pre-petition lien through the date of filing the petition.

For example, if an owner is delinquent and files a petition for bankruptcy, the Association may not continue to collect the debt—whether it is through collection letters, small claims lawsuits, or foreclosure. The Association may ask the bankruptcy court for permission to collect on any debt accumulating after the petition filing or it can wait until the case is discharged to continue with any pre-petition lien or post-petition collection activities.

While the automatic stay prevents the Association from collection activities, the Association still has the duty to enforce the covenants, restrictions, rules, and regulations in its governing documents. While a stay in in place, the Association may continue to enforce the rules in its usually manner so long as the Association does not attempt to collect an enforcement assessment without permission from the court.

For example, if an owner files bankruptcy and violates the rules of the Association, the Association may send an enforcement letter containing the appropriate statutory language required to charge an enforcement assessment. The enforcement letter should explain that the failure to cure the violation might result in a fine added to the owner’s post-petition balance due.

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