If a homeowner fails to pay a balance due to their association, there are two ways to attempt to collect that balance. The first is through the personal assets of the homeowner. The second is through the lien against the property.
Personal Liability:
Unpaid balances due to an association are the personal responsibility of the homeowner. In order to collect against a homeowner, the association files a lawsuit against the homeowners. This lawsuit is generally in County Court, where the process and procedures are cheaper and faster than in District Court. The goal of a County Court lawsuit is to obtain a judgment against the homeowners for the balance due to the association. Once the Court enters judgment, collection options switch from voluntary collections to involuntary collections. The association can use collection methods such as garnishing wages or garnishing bank accounts in order to collect the judgment amount. In these instances, we are collecting from the personal assets of the homeowner.
Lien:
Unpaid balances are also a lien against the property. The association has a lien against the property as soon as a balance becomes due, regardless of whether or not a paper lien has been recorded yet. However, title companies are more likely to catch the lien if a paper lien is recorded with the County where the property is located. Because of this, we always recommend a paper lien be recorded.
While some homeowners may pay the balance due just to remove the lien against the property, the lien is most valuable if the homeowner is refinancing or selling their home. In either case, the title company handling the closing will contact the association (or its management company, if there is one) to request a status letter. The association’s status letter provides information for the closing, including the total balance due through the closing date. At closing, a check will be cut to the association for the balance due on the lien in order to clear title.
Additionally, when an association forecloses on a property because of a large unpaid balance due, it is foreclosing on its lien, not on the homeowner personally.
Who Cares?
This may seem like a legal nuance with no real impact. Regardless of if you collect from the personal liability or the lien, the association gets paid either way, so who cares? In some cases, that’s true, but the distinction between the two options is important to understand in two circumstances:
- Bankruptcy: If a homeowner files bankruptcy, they are attempting to remove the debt from their personal liability. If the bankruptcy proceeds through the process to the end and is discharged (not dismissed), then the homeowner is no longer personally liable for the balance due as of the date they filed bankruptcy. However, in most cases, the lien against the property is not impacted by the discharge of the personal liability.
Example: Homeowner files bankruptcy on December 31, 2022 and later receives a discharge. The homeowner is no longer personally liable for any balance that came due as of December 31, 2022, so that balance needs to be separated from the balance starting with the January 1, 2023 assessment. If the association were to file a lawsuit against the homeowner to collect against him, it would only be for any balance due starting with the January 1, 2023 assessment and later. However, the lien is still good for the full balance, including the pre-January 1, 2023 balance. So, if the homeowner were to sell or refinance their property, the status letter provided to the title company would claim the full balance due.
- Foreclosure: If a homeowner’s mortgage company is foreclosing, they are foreclosing their lien against the property. Colorado law provides that once the foreclosure sale is completed, the association’s lien is extinguished except for the six-month superlien. However, the mortgage company’s foreclosure does not impact the homeowner’s personal liability for the balance that came due while he was still the owner of the property.
Example: Homeowner’s mortgage company initiates a foreclosure, the foreclosure sale is completed and title transfers to the post-foreclosure owner on August 31, 2022. The new owner of the property takes responsibility for any new assessments starting with the September 1, 2022 assessment. On August 31, 2022, the association’s lien is extinguished, with the exception of the superlien. If the new owner were to sell or refinance the property, the only portion of the prior owner’s balance that remains due on the old lien is 6 months of assessments. The prior homeowner remains responsible for any balance that came due during the time they owned the property up until August 31, 2022. If the association were to file a lawsuit against the homeowner to collect against him, it would be for the balance due through August 31, 2022.
However, whether or not it makes financial sense to pursue a prior owner in this scenario depends on a number of factors such as if we know where the prior owner now lives, if we have any asset information about him, and if he has recently filed bankruptcy.
While the distinction between personal liability and the lien against the property can sometimes seem like a meaningless distinction only the lawyers are concerned about, it is important to understand the differences so that the association is in the best possible position in the event of a bankruptcy or foreclosure. If you have any questions or concerns about collections options, please feel free to contact any of our Altitude attorneys at 303-432-9999 or [email protected].