When Should an Association Consider Forgiving an Owner’s Debt?

Owners in your community may frequently request that the board forgive their debt.  Can, and should, the board do this?  First of all, as many of you are aware, the Board has a fiduciary duty to collect assessments on behalf of the association.  That includes the ability to not only assess late fees and interest on delinquent accounts, but to also collect on late fees and interest, as well as attorney fees and costs that are incurred in the collection process.  That being said, the board does have discretion to make decisions for the association regarding forgiveness of debt.  When determining whether to forgive some, or all, of an owner’s debt, the Board must consider the following:

1.  Selective Enforcement – A board has a fiduciary duty to ensure the association collects its assessments.  Forgiving one owner’s debt while forcing another owner to pay the entire balance may be considered selective enforcement.  However, as long as the board is acting prudently, in good faith, and in light of the specific circumstances and the best interests of the association when making decisions regarding forgiveness of debt, this will typically not be problematic.
2. Specific Circumstances – A board should certainly consider the circumstances of the owner’s request.  Is the owner employed?  Is the property in foreclosure?  Has the owner filed bankruptcy?  Are there medical issues which prevent the owner from paying?  The board should consider the specific circumstances of each owner making a request in order to make a prudent decision on behalf of the association.
3. Collect the Hard Costs – Our advice is to always collect, at the very minimum, the assessments and “hard costs” of the association.  Hard costs would include attorney’s fees that have been paid to the law firm to collect on the debt.  “Soft costs,” such as late fees and interest are more negotiable, and can be used to help settle a matter with an owner.

Requests for forgiveness of debt also often happen when there is a short sale involved.  If you have questions regarding forgiveness of debt or how and when it should be done, please contact one of our collection attorneys at 303-432-9999.