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December 26, 2008
THE MOST IMPORTANT THINGS YOU NEED TO KNOW ABOUT BANKRUPTCY
I am in the process of working on a Primer that tells readers what to expect when a homeowner account goes into bankruptcy and the HOA is trying (hoping, pleading, whining, threatening, etc.) to collect the outstanding assessments. But I told a reader who is anxious for some information right away (because she is on a board and a homeowner account went to bankruptcy) I would write a brief blog on what is critical.
1. The HOA needs to have a good enough collection policy in place that a lien goes on a property with delinquent assessments at the earliest possible time. I realize that Boards do not like to authorize liens on their friends and neighbors; however, if a homeowner goes into bankruptcy and there is no lien, there is no secured place in line to collect money. Unsecured creditors generally get zip. Secured creditors generally get paid something, sometimes all, sometimes only a percentage of what is owed, but usually more than zip.
2. Once an owner files bankruptcy, there are two classes of assessments, those called "Pre-Petition", that are wrapped into and disposed of within the bankruptcy process and those that are "Post Petition" (those that are not disposed of within the bankruptcy process). The definitive date is the date the BR petition is filed.
3. Once a bankruptcy is filed, things are generally locked in - meaning the delinquencies outstanding become part of the Pre-petition assessments and costs that are considered in the bankruptcy. If an owner files a Chapter 7 bankruptcy, that is generally known as a "no asset" bankruptcy and creditors can expect nothing on the dollar. If the owner files a Chapter 13 bankruptcy, there is a plan to pay all or a part of the debt (usually only a part - meaning usually only the secured creditors - leaving the unsecured creditors at great risk) as that type of bankruptcy is a reorganization of debt.
4. If an HOA gets a notice of a bankruptcy, then the HOA needs to respond and file a Proof of Claim. The HOA should receive this form if the bankruptcy court is allowing claims, such as in a Chapter 13. It is important to note the security interest (the lien) if one is recorded so that the HOA makes the secured debt group. A lien cannot be recorded AFTER the Petition for Bankruptcy. That would be a violation of the "stay". The "stay" is something imposed on creditors that prohibits them from actively pursuing collection against a debtor when the bankruptcy has been filed. It protects the debtor.
5. The HOA debtor should be paying post petition assessments to the HOA but if he or she does not, the HOA is still limited in what it can do to collect and should consult an attorney about options. If it actively pursues an assessment that is imposed after the bankruptcy is filed, it might find itself in contempt of court.
There is much, much more to say about bankruptcies and how to get involved, weigh in on any payment plan, seek a lift of the stay so certain actions can be taken, followup with the court, stay on top of plan payments, etc. Watch for the Primer coming soon. (Check out the other Primers too in the Webstore at http://www.californiacondoguru.com.)
Posted by Beth Grimm at December 26, 2008 2:06 PM