It’s Tuesday night and your board is gathered around the table in the clubhouse reviewing the board packet with last month’s meeting minutes, vendor contracts to review, and the dreaded delinquency report. A collective groan escapes and your treasurer asks, “What can we do to collect on these delinquencies faster? Why does it take so long?” Assessments are the lifeblood of an association and the necessity of an association to collect delinquent assessments is vital to any community. As nonprofit corporations, the cash flow provided by payment of assessments is necessary to function and fulfill its obligations to the community. So, why does it take so long?
The ability of an association to collect delinquent assessments is provided primarily from three sources: the Colorado Common Interest Ownership Act (“CCIOA”), the association’s Declaration of Covenants, Conditions and Restrictions (“CCR”), and the association’s collection policy. In addition, debt collectors are bound by both the state and federal Fair Debt Collections Practices Acts (“FDCPA”).
CCIOA and your association’s CCR generally govern how the board may collect against owners who are delinquent. CCIOA authorizes associations to levy assessments, collect delinquent assessments, and assess penalties for nonpayment of assessments, some of which include late fees, interest, attorney fees, and costs. Your association’s CCR will more specifically provide for due dates, late fees (typically to be determined by the board), an interest rate, and will further provide notice of what additional consequences may arise from nonpayment of assessments, such as restrictions on use of amenities or voting rights.
The association’s collection policy will further specify and delineate the process of collecting on delinquent assessments. First, ensure that your association has a collection policy. If your association doesn’t have a collection policy (it’s a required document), adopt one. Since 2005, associations have been required to have a collection policy in place. However, in the 2013 legislative session, the Colorado legislature passed House Bill 1276 (“HB 1276”), otherwise known as the HOA Debt Collection Bill, which required additional provisions to be included in the policy. In addition to laying out the procedure for notices that must be sent to an owner, HB 1276 required that prior to an account being turned over to an attorney or collection agency, the association must send the delinquent owner a written notice that offers an opportunity to enter into a payment plan for a minimum of six months. Also, the association must notify the delinquent owner of what action is required to cure the delinquency and failure to do so within thirty days may result in collection efforts.
A typical time frame for collections, prior to an account even being turned over to an attorney for collections, will look like this:
Due Date: 1st day of the month
Past Due Date: One day after due date
First Notice: Any time after 10 days after due date
Second Notice: Any time after 60 days after due date
Turned Over for Collections: Any time after 90 days after due date
By the time the account is turned over to the attorney’s office for collections, it will be ninety days past due, so it has likely been on your board’s radar for at least one month at that time, if not more! Now take into account that the association is required to offer a delinquent owner a payment plan of at least six months, and suppose the owner enters into said payment arrangement, but then defaults three months later. The owner would then be four to six months past the original delinquency. It’s time to take swift and aggressive action – turn it over to the attorney’s office for collection efforts!
Once an account is turned over for collection efforts to the attorney, the attorney must also take required steps in order to comply with the FDCPA (both state and federal). First, a demand letter must be sent to the delinquent owner (“debtor”) stating the amount of the debt, the name of the creditor, and that the debtor can dispute the debt within thirty days. Your board may feel frustrated by this step because the debtor has already been provided so many notices and opportunities to pay the debt. Why another letter? As debt collectors, we are required to comply with the provisions of the FDCPA, which provide additional protections to debtors. This first demand letter provides the opportunity to dispute, which is one of the protections.
If a debtor fails to respond to the demand letter, the attorney will review the account to determine the next step for collection of the delinquent assessments. Typically, the matter will move to “lawsuit” stage. Many of our cases proceed in county court, where the jurisdictional limit for the court is under $15,000. When preparing a lawsuit, the date on which the debtor must appear in court (once served) will be between 45-63 days (pursuant to the court’s schedule for civil money matters). It is at the attorney’s discretion to pick a date for the debtor to appear, but it cannot be more than 63 days from the date the lawsuit is prepared. You must also consider the time it takes a process server to serve the lawsuit on a debtor. In many cases, this can be a significant obstacle.
Once the debtor has been served with the lawsuit, he or she is required to appear in court on the specified date. At that time, the debtor has the opportunity to discuss the matter with the attorney present in court on behalf of the association and pay it in full, enter into payment arrangements, or otherwise dispute the debt. If a debtor disputes the debt, he or she will file an answer with the court. The answer is the debtor’s response to the lawsuit. Once an answer is filed, the court will typically require the parties to participate in mediation, a pre-trial conference, and then if the matter has not been settled, the parties will proceed to trial.
The association may obtain a default judgment due to the debtor’s failure to appear in court and respond to the initial lawsuit. Failure to appear at any one of the court-mandated appearances (mediation, pre-trial conference, or trial), allows the association to ask the court for a judgement. Once judgment is obtained, the court requires the debtor to pay the amount immediately, right? Wrong. The judgment represents a legal obligation to pay a debt. The manner in which the creditor’s attorney proceeds to collect on that obligation is between the attorney and its client, the creditor. So, what happens once a judgment is obtained?
Once judgment is obtained, if the creditor has information about a debtor’s bank account or wage information, the attorney can use that information to move forward with the bank and/or wage garnishments. For a wage garnishment, the attorney will request that the court issue a garnishment for the judgment amount, plus post-judgment costs and interest (less any payments made). Once issued, the garnishment will be sent for service on the debtor’s employer.
Serving an employer is typically much simpler than serving an individual debtor with a lawsuit or other pleadings because an employer will generally have a registered agent in the state that is authorized to accept service. Once the employer is served, it is required to start withholding funds from the debtor’s paycheck to pay to the creditor (generally 25% of the debtor’s disposable earnings (wages left after the employer has made deductions required by law). A wage garnishment will remain in place for 182 days unless the judgment is satisfied prior to the expiration. If the judgment is not satisfied within 182 days, a new request for garnishment may be filed with the court.
With a bank garnishment, the attorney will again request that the court issue a garnishment (same as above) and once issued, the garnishment will be sent for service on the debtor’s bank (typically on or around a pay day, in order to hopefully capture the most amount of funds in the account). Once the bank is served with the garnishment, it must “freeze” funds in any account held by the debtor (even jointly with another person) up to the amount of the garnishment, if available. Great! The bank will now send the money to the attorney, right? Wrong.
Once the bank freezes the funds, it has seven days to answer the garnishment. That means that the attorney will not typically find out how much is being held by the bank until seven days after service of the garnishment (even though the debtor is usually made aware of it immediately, especially if he or she no longer has access to any funds in the account).
When the attorney receives the answer, it has to send the garnishment, the bank’s answer, and a claim of exemption form (“garnishment package”) for service on the debtor. This cannot be mailed. Like the lawsuit, it must also be served and as we know, service can often be a significant obstacle in the collections process. Once the debtor is served with the garnishment package, he or she will have fourteen days to claim an exemption or otherwise object to the funds being held.
If a debtor files an objection, the court will order that a hearing takes place (typically set within fourteen days, but can be more) in order to make a decision on the debtor’s objection. If there has been no objection after fourteen days of service on the debtor, or once the judge makes a decision on any objection made by a debtor, the court will issue an order for the bank to release the funds to the creditor or its attorney. Actually, getting the funds released can take anywhere between seven days and three months or more!
The above lays out just a few steps in the collection process for delinquent assessments and as you can see, it can take some time to collect. For boards that are constantly reminded of the delinquencies in their communities, this can certainly be frustrating! So is there anything a board can do to speed up the process? YES! Consider acceleration of the assessments.
Acceleration allows a board to accelerate the entire fiscal year’s debt against the owner’s account, rather than just the current delinquency. By accelerating assessments against an owner’s account, the association is able to more economically pursue collections against an owner. This is because a single collection action (and a single set of legal fees and court costs) is brought, rather than multiple actions throughout the year. Associations should be mindful, however, that this remedy can backfire against an association in the case of a subsequent bankruptcy or foreclosure. Therefore, the ability to decelerate assessments in such event is also an important protection against the loss of future assessments.
When considering whether to accelerate assessments against an owner’s account, the board must first ensure it has a legal right to accelerate (which should be set forth in the declaration or collection policy). Second, the decision must be documented in the board’s records. The decision can be made on a case-by-case basis for repeat debtors or because other circumstances warrant acceleration. The board can also choose to make a blanket decision for acceleration. For example, all accounts turned over to the attorney’s office for collections are accelerated per the association’s policy. Whatever the board’s policy, decisions should be well documented.
Collection of delinquent assessments from non-paying members of your community can be frustrating. Your attorneys should partner with you to make sure that it is as painless as possible. And part of that involves education about the process. There are so many different avenues that an account can take and all may have different time frames, benefits, and potential consequences for each action.
For questions and answers to some frequently asked questions about delinquencies, please reference our webpage at altitude.law. If you’d like assistance in drafting or modifying your collection policy, or want to discuss other options regarding collections, please contact one of our attorneys at 303-432-9999 or send us an email to [email protected]