The Bankruptcy Roadblock: How To Protect Your Association

The situation is all too common: The Association has a delinquent owner that owes several thousand dollars in past-due assessments and other fees. The Board took every step it needed to by following its collections policy, placing a lien on the property, and filing foreclosure. As the long foreclosure process comes to a close, the board is looking forward to getting a new owner in the unit. The property is set for sheriff’s sale when suddenly, everything comes to a halt: the delinquent owner has filed for bankruptcy.

Bankruptcy can be especially frustrating for associations. The silver lining is that if the association has a lien on the property, it will generally enjoy advantages over other types of creditors in a bankruptcy.

Bankruptcy is a complicated proceeding, and each case will be different. In a typical Chapter 13 case, the Association generally has two options to protect its interest: filing a proof of claim and obtaining relief from automatic stay.

Filing for bankruptcy imposes an “automatic stay”. An automatic stay means that any and all collection efforts against the debtor for the pre-bankruptcy delinquency must stop, including placing a lien on the property or continuing a foreclosure case.

There are two steps the Association should take immediately upon learning of a bankruptcy – the first is to notify our office and the second is to start a separate accounting for any and all delinquent fees, legal costs, assessments, etc., that are incurred after the owner files for bankruptcy.

Associations have options when it comes to protecting their interest in a bankruptcy case. If the Association has filed a lien on the property, the Association should have our office submit a proof of claim. A proof of claim is a way of proving to the court that the Association is entitled to be in the bankruptcy plan. This means that the Association will be paid back from pre-petition assessments through payments made by the delinquent owner in accordance with their plan.

In addition to a proof of claim, if the Association is already involved in a foreclosure against the delinquent owner when they filed for bankruptcy, the Association could ask for relief from the automatic stay. Relief from automatic stay is special permission from the bankruptcy court to continue a foreclosure suit.

This means that an association that was in the middle of an interrupted foreclosure suit can continue the suit, even though a bankruptcy has been filed. Relief may be given if the Association can prove that the delinquent owner has not been making his or her association payments since they filed for bankruptcy.

Bankruptcy can be a daunting obstruction to Associations. It can cause prolonged delays in getting a new owner in that will pay the Association on time. The Association does have options, however. The bankruptcy process also underscores the importance of placing a lien on a delinquent owner’s property. If you have questions regarding bankruptcy or your Association’s collections procedure, please feel free to call our office anytime.

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