A Practical Approach to Collecting Association Assessments

Introduction

Assessments are the life blood of community associations. The Board of Directors has a fiduciary duty to collect assessments from owners. If the Board of Directors fails to fulfill its fiduciary responsibility to ensure assessments are received from all owners in a timely manner, it will in many instances be unable to carry out its other responsibilities in the administration of the association and the preservation, maintenance, and enhancement of the value of properties. Where assessment collection problems are widespread in an association, the Board may be forced to delay or curtail needed maintenance or repair, causing property values to drop.

Adopting a policy which provides a systematic and disciplined approach to collecting delinquencies forms the foundation of a successful program for avoiding financial loss to the association as a result of owner delinquencies. In most cases, the Board of Directors can adopt a collection policy without special owner approval based upon the authority granted to it by statute and the association’s governing documents. This article will explore the elements of a workable collection policy and the issues which a board and the association’s attorney should consider in framing and implementing a collection policy.

Rationale for Adopting a Formal Collection Policy

Colorado law requires an association to have a collection policy before an attorney or collection agency makes any collection efforts or initiates a foreclosure on behalf of the association. Additionally, the law requires very specific information be included in the policy. We strongly recommend all associations either have an attorney draft the collection policy or review the collection policy if it was drafted by someone else. Even if the association does not currently have any owners that are delinquent in paying their assessments right now, it is better to have the policy in place now, rather than having to get a policy in place later and delay collection action until the policy is drafted, adopted and followed before sending the owner to an attorney or collection agency.

Aside from the practical requirement of having a collection policy before proceeding with collection efforts, a number of goals may be served simply by the Board’s adoption of a formal collection policy resolution. A collection policy can educate owners about their obligations to the association and consequences of failure to meet those responsibilities on time. Owners who read a well-written collection policy will know what to expect from the Board and will understand that the Board is serious about dealing aggressively with non-payment of assessments. Frequently, this information alone is the best deterrent to owner delinquency. By initiating new collection programs with many associations, it has been our experience that merely adopting and publishing a clear collection policy often cures a percentage of existing collection problems.

A well-drafted collection policy provides a road map and checklist to guide the Board and the manager in handling delinquencies. It clearly sets forth a step by step process and specifies each individual’s role. It also provides a mechanism for the exercise of discretion where unforeseen circumstances such as loss of employment, illness, or death of a wage earner call for compassion in negotiating a payment arrangement. Where it is clear in advance what is to be done, by whom and when, there is no time or effort wasted in trying to figure out what to do next.

Consistent Policy Application Improves Outcomes

Adhering to the specified procedure in every instance of owner delinquency ensures the consistent, non-discriminatory, and predictable handling of collecting assessments. This disciplined approach has been proven to enhance the timely collection of sums due to the association. Consistent enforcement, backed up by a clear written policy, avoids or answers charges that the association is proceeding in a selective or discriminatory manner. Such allegations by a delinquent owner can erect substantial obstacles to judicial enforcement of the association’s rights and, if proven, can defeat, or at least delay, the association’s recovery

The Collection Resolution

A collection policy, like all policies adopted by the association Board of Directors, should be embodied in a proper resolution. That resolution should specify the problem to be solved, the authority allowing such action, and a designation of the particular procedures to be followed and the circumstances under which they are required or permitted. The collection policy may also be included in the association’s rules and regulations and contain the same provisions as a resolution.

Authority

The remedies an association is empowered to use will vary based upon the authority provided by the association’s governing documents and statutes. Thus, particular care must be taken to ensure that any action which is specified in the collection policy is within the power of the association. Where the Board exceeds its power, it may open itself and the association to liability to the damaged owner, and may handicap the association in its efforts to collect assessments. Such damage may not be limited to the failure to get the requested relief in the particular case. For instance, if an association appears before the same judge in the future, its credibility may continue to suffer. An association’s collection case would be filed in the county where the property is located. Additionally, most collection cases are filed in County Court and many counties have only one County Court judge that hears these types of cases. Therefore, there is a high likelihood that all of an association’s collection cases are heard by the same judge and credibility becomes extremely important.

Contents of Collection Policy

The collection policy must contain very detailed information as laid out by Colorado law. Any collection policies that do not contain all the information required by statute will not be compliant and should be revised immediately. In addition, the collection policy should contain a detailed progression of steps which will be taken by manager, treasurer, or other person who has primary responsibility for collecting non-delinquent assessments. Written communication with an owner should be made frequently and soon after an owner becomes delinquent to call attention to the problem and to seek a quick cure of assessment default. Sanctions imposed by the association, the remedies sought, and the tone of the contacts should become more severe with each sequential communication. For example, steps may progress from a friendly phone call to a reminder notice to the imposition of a late fee, to the payment plan offer letter required by Colorado law, then to turning the account over to legal counsel for legal action and filing of a lien.

Options

These collection procedures, and their timing, may vary from association to association. Some associations may require a reminder be sent to the owner before levying a late fee. Others use a progressively increasing late fee as the delinquency ages. Another available remedy may be the acceleration of assessments which results in the entire year’s worth of unpaid annual assessment becoming due and payable immediately. Still others suspend a delinquent owner’s right to use amenities or to exercise voting rights. As stated above, associations wishing to use any of these tools should make sure that such use is authorized by either Colorado law or by their governing documents.

No matter what sanctions are chosen, these measures should be automatic and non-discretionary where payment or, in appropriate cases, a satisfactory agreement for payment is not received from the owner. An association’s procedures should incorporate a mechanism for allowing the exercise of discretion in cases where circumstances merit special consideration. Where discretion is to be authorized, steps should be taken to ensure that decisions are based upon well-understood and uniformly-applied principles, and are made in a fair and non-discriminatory manner.

Special Considerations

The burden of requesting special consideration should be placed upon owners who, for circumstances beyond their control, are unable to meet assessment obligations in a timely manner. Opportunity for an owner to request special consideration should also contain time limitations so an owner is not rewarded for delaying such request. For example, a collection policy could require that any request for deviations from the stated policy must be made within sixty (60) days of the initial delinquency or it will be considered waived.

Turn Over to Attorney

Where the Board’s attempts to resolve the delinquency through written communication are unsuccessful, the manager or treasurer should be authorized and required to turn the account over to the association’s legal counsel. The authority of the attorney to act for the association should be defined and sufficient discretion should be granted to deal with the particular circumstances presented by each case. As always, the goal of the association is to achieve full payment quickly while minimizing added expenses for the association and the owner. Providing authorization to the attorney within certain limits can drastically reduce collection times. For example, a board could authorize the attorney to waive soft costs such as interest and late fees on all files in exchange for payment in full from the owner. The attorney can then negotiate a settlement with a given owner within those limitations, without the need to consult the Board with each settlement offer. As there are often 30 or more days between board meetings, having authority to waive certain charges can get money to the association much faster than waiting for a Board decision on each file.

Role of the Attorney

Associations should utilize a standard form for forwarding an assessment account to its legal counsel. Providing and using a standard form helps to prevent miscommunication and helps control costs. The form should, to the extent available, include the following:

• The name of the association;
• The name and phone number of its manager or contact person;
• The address to be used for communications regarding the account;
• The billing address for the association, if it is different;
• The owner’s name;
• The owner’s address;
• The owner’s mailing address, if different;
• The owner’s telephone numbers;
• The owner’s email address;
• Name and phone numbers of any tenants if the premises are not owner occupied;
• Any information association has collected with regard to owner’s bank accounts, such as copies of checks the owner previously used to pay assessments;
• Descriptions and license numbers of the owner’s vehicle;
• The name, address and telephone number of the owner’s employer;
• A ledger for the account showing all debits and credits from the time that the delinquent account was last current to the present time, including any balance forward provided by a prior management company, if any;
• A copy of any association lien which has been recorded, if any;
• A copy of the required payment plan offer letter sent to the owner, including information on how the letter was sent, if it was returned by the post office as undeliverable, if a certified mail receipt was received confirming receipt, etc.;
• All correspondence relating to the delinquency or which might relate to a claim or defense by the owner against the association;
• All documents received by the association regarding a foreclosure against the owner or a bankruptcy by the owner;
• If a special assessment is involved, a copy of the resolution approving the special assessment which encompasses the amounts and due dates of the assessment; and
• If the association’s attorney does not already have a copy of the Declarations, Bylaws, Articles of Incorporation, and the association’s current Collection Policy, these documents should also be included with the initial packet sent to the attorney.

Communications with Owners after Turn Over

Once an account is turned over to the association’s legal counsel for collection, it is critical to counsel’s success that all further communications between the association and the debtor be handled directly between the association’s attorney and the owner, or the owner’s attorney. Owners will often try to go around the association’s attorney by appealing to the sympathy of their neighbors on the Board. Such contact should be met with a standard response, “I’m sorry, but association policy prohibits me from discussing this matter with you. Please work it out with our attorney.” This insulates board members from improper pressures. It also allows the attorney to be the “bad guy” rather than the neighbor. Most importantly, it avoids inconsistent and conflicting communications between the Board and owner, the potential for misrepresentations by an unscrupulous owner regarding “agreements” made directly with the Board, and the undercutting of the attorney’s authority and effectiveness. Additionally, attorney fees and costs are billed to the association monthly and so if a board member or manager provides a balance due to the owner, it may not include all the attorney fees or costs incurred to date. If a board member or manager quotes a balance due to the owner and the owner pays that amount, it must be accepted as payment in full and any additional attorney fees or costs incurred but not yet added to the owner’s ledger would not be collectable from the owner.

Attorney Actions

Upon receipt of an account for collection, there are several steps that a prudent attorney should take before contacting the debtor. The order in which these steps are performed and the combinations may vary due to the specific circumstances and policies of the association and also the particulars of a particular file. For example, if the owner had a recent collection file with our office, we may have information that we might not otherwise. However, in general, the following actions should be taken:

1. Title research. First, the attorney may verify with a title company or the county assessor’s office that the record title to the property is in the same name or names that the association believes it to be. More often than one would expect, this inquiry may reveal that there are co-owners who are jointly and severally liable for the assessment obligation, or that there has been a transfer of title that has not been reported to the association. The association’s letters must be sent to all owners that the attorney intends to attempt to collect from. Therefore, if the association’s payment plan offer letter was sent to only one of multiple owners, the attorney will likely request the association send a new payment plan offer letter to all owners and wait the additional 30 days for the expiration of the new letter and open the attorney file after that time, if the owners do not respond to the letter.Search of the Public Trustee’s records may also reveal that a senior lender has initiated a foreclosure proceeding against the property. Although a junior lienor such as the association is entitled to notice of a foreclosure, if the association’s lien is not of record at the time that notice is given, the lender may be unaware of the lien or not have an address for notice. As a result, this title search may be the first notice to the association that there is a foreclosure pending against the property.
2. Bankruptcy. The attorney should check the records of the U.S. Bankruptcy Court in the district where the owner resides before taking any collection action. The filing of a bankruptcy imposes an automatic stay against any debt collection efforts against the debtor. An automatic stay prevents the commencement or continuation of any court proceedings against the debtor that may affect the debtor’s estate.Because collection proceedings involve monetary claims against the debtor, such proceedings are automatically stayed. During the bankruptcy proceeding, the debtor is under the protection of the bankruptcy court and any proceedings against the debtor may not be pursued without the court’s permission. Violators of the automatic stay have incurred substantial fines from the court, even if they did not know about the bankruptcy at the time of the violation. Therefore, it is imperative that the attorney confirm there is no bankruptcy pending before proceeding with any collection actions.
3. Verify the debt. The attorney should verify that the assessments which are claimed to be due have been properly levied by the association. Additionally, the attorney should confirm that the association has a collection policy that complies with Colorado law and that the association sent the owner the required payment plan offer letter. Failure of the association to comply with procedures mandated under either the applicable statute or governing documents may invalidate the assessment and any collection efforts.

Collection Options

After verification of assessment validity, the attorney should send a demand letter to the owner to inform them of the amount that is owed and that legal action may ensue if the amount is not paid. If there is no response to the demand letter, the next step is to commence a lawsuit against the owner for the assessments owed to the association. Often several courses of action are available to the association. The association usually has the option to sue the owner personally for money judgment, foreclose the association’s lien for assessments resulting in a judicial foreclosure, and/or have a receiver appointed to collect rent on a property, if applicable. It is the role of the attorney, in consideration with any instructions from the Board, to consider the facts and circumstances of each case and recommend an appropriate strategy for proceeding.

Where the amount of the delinquency is small, it will usually be advisable to sue for a money judgment rather than commencing a judicial foreclosure. Courts are often reluctant to grant any relief – including foreclosure – which will deprive owners of their home for minimal defaults. Foreclosure actions are generally substantially more expensive than actions for money judgment. Where a delinquency is small, foreclosure costs and fees may be out of proportion to the amount of the delinquent assessments. When this happens, a court may refuse to award the full amount of the association’s attorney’s fees.

Money judgments may be particularly attractive where an owner is employed, or where the association has kept a record of the owner’s bank account information from past payments. In these instances, the owner’s wages or bank account can often be garnished relatively quickly and inexpensively to collect on the judgment. Garnishment involves the issuance of a court order after a judgment, which requires a bank, employer, or other creditor of the defendant, to withhold and turn over to the court, for the benefit of the association, any money in its possession.

Evaluating Settlement Offers

While the immediate payment of all sums due is the most desirable collection result, this may not always be possible. To ensure that the owner(s) will be able to pay the sums due, settlements may call for payments over a period of time and/or a reduction in the balance due. A stipulation or payment agreement should be used to document any settlement agreement and installment payment plan. A stipulation is a document signed by the owner and ordered by the Court which, unlike a payment plan, may provide the basis for entry of a judgment against the debtor without a trial. A stipulation specifies an exact amount that an owner must pay by a specific date that is agreed upon by both parties. Thus, if the owner does not comply with the stipulation requirements, the association can request the Court enter judgment against the owner without the need for trial. After judgment is entered, the association may garnish the owners’ wages and bank accounts.

A stipulation serves several purposes. First, it minimizes later opportunities for misunderstandings about the agreed payment dates and amounts. Second, it ensures a quick result if an owner subsequently defaults and it is necessary to reduce the association’s claim to judgment. Finally, it minimizes out-of-pocket expenses for the association since it results in a judgment without an actual trial. In essence, a stipulation is an efficient tool with many benefits to the association.

However, a stipulation is not an option or appropriate at all points in the collection process. If a stipulation is not available as an option, the attorney should still put any settlement or payment plan agreement in writing, with a copy provided to the owner, in order to confirm all parties agree to the terms of the agreement.

After a Bank Forecloses

Where a bank or other lender with a senior lien has foreclosed on the unit and ownership of the property has transferred away from the delinquent owner, it is likely that the only collection option open to the association will be a personal judgment against the prior owner for money due. Under Colorado law, the association has a super lien equal to six months of assessments. This super lien has priority over all deeds of trust executed after July 1, 1992 against the property. Therefore, even if the senior lien has been foreclosed, the association can generally collect its super lien by contacting the foreclosing party. The superlien payment is credited to the balance due from the prior owner. Any additional amounts due from the prior owner remains due from the owner, but whether or not the association can collect will depend on the practical circumstances of each case, such as if the owner is employed, can be located after the foreclosure, etc.

The Association’s Foreclosure Option

Foreclosure may be the recommended technique where an owner has had repeated delinquencies. It may also be advisable if the homeowner has not paid assessments for a significant amount of time and the owner’s equity in the unit is substantial. Where the property is rented by the owner or vacant, the association may, as part of the foreclosure, have a receiver appointed to rent the property and apply the net rental receipts against the assessment liability pending the foreclosure sale.

Foreclosure may also be the preferred alternative if an owner lives out of the state or in a different country. Similarly, where owners have little equity in their unit due to a senior mortgage encumbrance, foreclosure by the association will in most cases be unproductive. However, there may be reason to proceed with a foreclosure even with the low equity. The Board should discuss the specific circumstances of each potential foreclosure to determine the best course of action with the most chance for successful resolution.

Foreclosure may be the only remedy available to the association if an owner has no other assets or income, or has gone through a bankruptcy. An action for money judgment may not be brought where the owner’s personal debt to the association for assessments which became due before the bankruptcy petition was filed has been discharged by the bankruptcy court. This occurs unless the owner signs a reaffirmation agreement in which they agree to pay the debt, even though not personally liable, to avoid foreclosure of a lien on the unit. However, reaffirmation agreements rarely happen. If an owner remains in the unit and has reaffirmed the mortgage, but does not reaffirm the assessment obligation, the association will be limited to recourse against its lien on the unit through a foreclosure.

Other collection considerations:

• Acceleration: If your governing documents allow it, accelerating assessments can be an effective collection option. When an owner is sent to collections and judgment is obtained, judgment is for balance due as of the date the judgment was entered. The judgment does not include future assessments or attorney fees incurred after the date of the judgment. However, when a garnishment is ordered by the Court, it is authorized for the amount of the judgment, plus post-judgment interest and minor additional costs. Because it often takes months from the time a judgment is entered to when a garnishment is paid, there are often several months of unpaid post-judgment assessments, late fees, interest, and attorney fees left due on the ledger after the judgment is paid through a garnishment. However, if the association accelerated the assessments, this problem can be minimized. Acceleration allows the association to call due all assessments due that calendar (or sometimes fiscal) year, if allowed by the governing documents. Acceleration should be done before an owner is sent to the attorney. That way, when the attorney receives the new file, it is for the full balance of assessments for the rest of the current year. The judgment will include assessments through the end of the year, so if a garnishment pays the judgment in full, at least the association is paid through the end of the year and won’t have to send the owner back to collections until at least the beginning of the next year.
• Pool Access: If an association’s governing documents allow, denying a delinquent owner access to the pool can be an extremely effective option. Many owners are frequent pool users and loss of this amenity can encourage them to become current in order to regain access.

Conclusion

The collection of unpaid assessments is one of the most important responsibilities of a Board of Directors because assessments are vital to the association. The development of a comprehensive collection policy can assist the association in educating the owners, deterring delinquencies and efficiently and effectively handling delinquencies when they do arise.