Winter is fast approaching and you may be wondering how your association is going to pay its bills if there is another bad winter.  Your delinquencies may be up and you see no hope in collecting all the money that is due.  Then the delinquent homeowner who was paying files bankruptcy.  Your frustration turns to anger, because the other members of your association are demanding services.  What hope is there to collect an account once a bankruptcy is filed?

An individual homeowner can file two types of bankruptcy.  A Chapter 7 Bankruptcy eliminates the homeowner’s responsibility to pay pre-petition balances.  A Chapter 13 Bankruptcy requires the homeowner to repay the pre-petition debts to the association – albeit during a longer period of time.  When either type of bankruptcy is filed, the association is not allowed to attempt to collect any debt from the homeowner without first obtaining authorization from the Bankruptcy Court.

Chapter 7 Bankruptcy  
The purpose of a Chapter 7 Bankruptcy is to give the debtor a fresh start.  Therefore, a homeowner is not required to pay assessments, fines, attorney’s fees or any other charges which are owed the association prior to the bankruptcy being filed.  However, the homeowner is responsible for post-petition assessments, fines, attorney’s fees and all other charges which are owed the association as long as the homeowner continues to own the property.  It should also be noted that, the associations lien for the full balance does remain against the homeowners property.

Chapter 13 Bankruptcy
A homeowner who files a Chapter 13 Bankruptcy is granted more time to pay off the debt – typically 3-5 years.  As long as the homeowner still owns the unit in the association, the association is considered a secured creditor.  When the Chapter 13 Bankruptcy Plan is in place, the homeowner is required to continue making the association’s current assessment payments.  However, the balance owed prior to filing for bankruptcy is paid off over time.

If the association does not believe that it is fully protected by the Chapter 13 Plan, it may object to the Plan until it is modified to reflect the full amount the homeowner owes to the association. If the homeowner  fails to pay current assessments, the association may move to have the Chapter 13 Bankruptcy dismissed. In a Chapter 13, the association should recover all monies due and owing.

A co-debtor is protected if the homeowner files a Chapter 13 Bankruptcy.  This means that as long as the association will receive full payment under the Chapter 13 Bankruptcy Plan, the association is prevented from attempting to collect the money owed from a co-debtor.  If the homeowner files Chapter 7 Bankruptcy, the co-debtor is not protected under the bankruptcy filing and the association may proceed against the co-debtor.

Bankruptcy Stay
When either a Chapter 7 or Chapter 13 Bankruptcy is filed, the association is prevented from attempting to collect pre-petition or post-petition debts owed until after the bankruptcy is dismissed or discharged.  If the bankruptcy is dismissed, the homeowner remains liable for the pre-petition debt owed the association.
The Bankruptcy Stay provides protection for the homeowner.  All collection activities must stop, otherwise the association may be held in contempt of court.  This means that the association should cease all communications with the homeowner regarding the amounts due, unless specifically authorized by the Bankruptcy Court.

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