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The Dreaded Word: BANKRUPTCY. What Does it Mean for the Association?

Whether it’s the loss of a job or the accumulation of too much debt, individuals continue to look to bankruptcy for an opportunity for a fresh start.  What does that mean for the Association if an owner files for bankruptcy?

When an owner files for bankruptcy, the court will usually notify the Association in writing.  Many times, the Association or its management company (and not our office) is notified of the initial bankruptcy filing.  If you receive a bankruptcy notice, please immediately send it to our office for review.  The bankruptcy court has many strict deadlines that we need to follow.

The word “usually” is chosen for a reason.  Sometimes, the court does not notify the Association because the owner does not list it as a creditor.  There are times when our office discovers a bankruptcy in our normal review of the case file and/or before we start or continue collection action.   If the Association is ever left out of a bankruptcy case, we can take steps to include those obligations in the bankruptcy filings.

After the Association is aware of the bankruptcy, the Association must split the owner’s accounts in pre-petition (maintenance fees incurred before the bankruptcy filing date) and post-petition (maintenance fees incurred after the bankruptcy filing date) accounts.  It is extremely important that the Association cease all collection efforts outside of the bankruptcy court, except for sending post-petition statements.  Any other action should be run by our office first.  If privileges have been suspended due to nonpayment of Association fees, then the privileges must be reinstated immediately.  If there is a foreclosure pending against the owner’s property, the foreclosure must be stayed as well.

If pre-petition maintenance fees are owed, but have not been secured by a lien, it is possible that the bankruptcy court will discharge the unsecured debt.  That is why it is so important to strictly adhere to your Association’s collection policy and make sure that liens are appropriately filed.

The collectability of both pre-petition and post-petition debt will vary depending on which chapter the unit owner files under.  Regardless of the type of bankruptcy, the Association cannot attempt to collect fees from the debtor unless the bankruptcy has been discharged, closed, or dismissed. 

Here is a brief explanation of the two most common forms of bankruptcy:

Chapter 7 Bankruptcy

When an owner files under Chapter 7, if a discharge is granted, all unsecured, pre-petition debt owed to the Association is discharged.  However, in most cases, unless discharge of the lien is specifically requested, if the Association has a lien on the property, the lien will carry through the bankruptcy, and be owed in addition to post-petition amounts.  Essentially, if a lien is placed on a unit before an owner files for bankruptcy, then the Association can foreclose on the lien if it has not been paid once the court has granted the owner a discharge.  The same holds true for a foreclosure—if the foreclosure started on a lien before the bankruptcy was filed, the Association can request that the foreclosure continue after the discharge has been granted.

Chapter 13 Bankruptcy

Under Chapter 13, an owner is requesting to enter into a repayment plan with the named creditors. In most cases, the Association will file a Proof of Claim with the bankruptcy court, stating the amount of the pre-petition debt.  The bankruptcy court will adopt a plan, where a set amount is required to be paid to the bankruptcy trustee monthly.  The trustee will distribute the funds according to the plan, and will issue a check to the Association each month.  However, the owner is still required to pay post-petition maintenance fees directly to the Association in a timely manner.  In some instances, the Association may not attempt to collect post-petition maintenance fees outside the bankruptcy court until the bankruptcy is closed, typically five years after a Chapter 13 bankruptcy has been filed.  If that is the case, the Association may petition the bankruptcy court for a relief from stay during this five-year period in order to continue a foreclosure or pursue other means of collection.  In other instances, the Association may take limited collection actions on post-petition amounts owed.

It is important that the Association notify our office immediately if documents are received from a bankruptcy court.  We can properly assess the individual matter and make sure that the Association’s rights are protected.

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216-771-2600

Ott & Associates Co., LPA

1300 E 9th St, Suite 1520
Cleveland, OH 44114

Ph: 216-771-2600
Fx: 216-830-8939

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