What Happens When A Member Files For Bankruptcy

During times of increasing economic distress and rising unemployment rates, many are looking to bankruptcy for an opportunity to have a fresh start. If one of the residents in your Association files for bankruptcy, what should you do, and what does that mean for the Association?

First, once a member has filed for bankruptcy, the Association will usually be notified by the bankruptcy court. After the Association is aware of the bankruptcy, it is important that the Association cease all collection efforts outside of the bankruptcy court, except for sending post-petition statements. If privileges have been suspended due to nonpayment of Association fees, then the privileges must be reinstated immediately. If there is a foreclosure pending against the owner’s unit, the foreclosure usually must be stayed as well.

With regard to maintenance fees, the Association will need to split up maintenance fees into two accounts—a Pre-Petition (maintenance fees incurred before the bankruptcy filing date) and Post-Petition (maintenance fees incurred after the bankruptcy filing date). If maintenance fees are owed, but have not been secured by a lien, it is possible that the bankruptcy court will discharge the unsecured debt. Therefore, it is important to strictly adhere to your Association’s collection policy, so that as much money can be recovered as possible during the bankruptcy proceedings.

The collectability of debt will vary depending on which chapter the unit owner files under. Regardless of the type of bankruptcy, the Association cannot attempt to collect fees from the debtor unless the bankruptcy has been discharged, closed, or dismissed.

Chapter 7 Bankruptcy
When a unit owner files under a Chapter 7 Bankruptcy, if a discharge is granted, all unsecured, pre-petition debt owed to the Association is discharged. However, in most cases, unless discharge of the lien is specifically requested, if the Association has a lien on the property, the lien will carry through the bankruptcy, and be owed in addition to post-petition amounts. Essentially, if a lien is placed on a unit before an owner files for bankruptcy, then the Association can foreclose on the lien if it has not been paid once the court has granted the owner a discharge. The same holds true for a foreclosure—if the foreclosure started on a lien before the bankruptcy was filed, the Association can request from Common Pleas that the foreclosure continue after the discharge has been granted.

Chapter 13 Bankruptcy
Under a Chapter 13 bankruptcy, a unit owner is requesting to enter into a repayment plan with the named creditors. In most cases, the Association will file a Proof of Claim with the bankruptcy court, stating the amount of the pre-petition debt. The bankruptcy court will adopt a plan, where a set amount is required to be paid to the bankruptcy trustee monthly. The trustee will distribute the funds according to the plan, and will issue a check to the Association each month. However, the unit owner is still required to pay post-petition maintenance fees directly to the Association in a timely manner. Unfortunately, the Association cannot attempt to collect post-petition maintenance fees outside the bankruptcy court until the bankruptcy is closed, typically five years after a Chapter 13 bankruptcy has been filed. The Association may petition the bankruptcy court for a relief from stay during this five-year period in order to continue a foreclosure or pursue other means of collection.

It is important that the Association comply with these general guidelines, as failing to do so may result in a violation of a bankruptcy stay and may result in fines and/or sanctions against the Association.

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