One of the greatest challenges community associations face is the collection of past due accounts. As nonprofit organizations, the cash flow provided by payment of dues and assessments is vital to the association to function and fulfill its responsibilities to the community. Nonpayment or delinquent payment of dues affect all homeowners in a community and prevent an association from completing necessary projects. Delinquencies may cause an association to raise dues for other members to make up the difference. Indeed, associations have a duty to the other homeowners to collect past dues in the most efficient way possible.
There are multiple options associations may utilize to collect past dues; however each option has its pros and cons. First, an association can simply file a lien and wait for the owner to refinance or sell the property. While this option is simple and inexpensive, collection may be lengthy, or not happen at all if an owner does not refinance or sell the home in the near future.
Second, an association can sue the delinquent owner to obtain a money judgment, and then garnish wages and bank accounts to collect on the judgment. Although often utilized by associations, this option may not be feasible in some circumstances. For example, it may be difficult to locate the owner, or the owner may live out of state and have no assets in Colorado. The owner may have no bank account, or be unemployed. The owner may be self-employed, or have assets that cannot be located or garnished. All of these situations may be barriers to obtaining or collecting on a money judgment.
The Foreclosure Option
The final collection option for an association is a judicial foreclosure. A foreclosure is an action filed in district court against the property itself. State statute and typically the governing documents, provide authority to Colorado associations to foreclosure judicially. Since foreclosure is an action against the property, rather than the person, it can be done even when the owner cannot be located, lives out of state, or is deceased.
An association contemplating foreclosure should first consider carefully the ramifications of the action. Foreclosure is a more drastic measure than the other options, and if successful, results in an association taking a person’s home who is a neighbor and member of the community. On the other hand for those owners who are perpetually in collections, or have run up a large balance, a foreclosure sends a strong message about the gravity of such actions and hopefully “inspires” other homeowners to bring delinquent accounts current.
One of the main concerns for an association contemplating foreclosure is the cost involved. Judicial foreclosure involves a district court lawsuit with multiple defendants and parties, and can be complicated procedurally. Cost, however should not be a deterrent to foreclosure. What many associations do not realize is that Colorado law mandates the attorney fees and costs for a foreclosure to be recoverable through the foreclosure. Even if the amounts are ultimately not paid by the owner, the association can sell the property after foreclosure and recover the costs if there is equity in the property.
Foreclosure in a Recovering Economy
One of the main benefits of a judicial foreclosure in the current recovering economy is the fact that many homes and properties in Colorado have equity. This provides associations more opportunities to recover all amounts owed through third parties that are looking to protect their liens, or purchase the association’s lien. Equity is the difference between the sale price of the home minus the amount owed on the first mortgage, plus any unpaid taxes. The association’s assessment lien has priority over any other junior liens or mortgages, meaning that if a junior lienholder (such as a second mortgage) wants to keep from being extinguished by the association’s foreclosure, it must pay off everything owed to the association.
In addition, there are many investors that seek out associations that have commenced foreclosures in order to purchase the associations’ liens. If there is equity in the property, investors usually offer full price of everything owed to an association to purchase the lien. The investor then steps into the shoes of the association and takes over the foreclosure action. The association is paid off and is no longer involved in the court action. Typically, there is a higher rate of recovery with a foreclosure and it is a more definitive way for the association to be paid in full.
Conclusion
Judicial foreclosure is an effective collection tool that overcomes many of the barriers that constrain other types of collection. Due to the high rate of recovery of the amount owed, it is an effective collection tool. It sends a message to the delinquent owners, and the community as a whole, of the importance of paying assessments and the commitment of the association to its members.
Please do not hesitate to contact a Altitude Community Law attorney at 303.432.9999 if you have questions or need additional information about judicial foreclosures.