Chapter 7 Bankruptcy Basics

Many condo and homeowner associations are experiencing an unprecedented rate of bankruptcy filings by owners. Some are current on their dues when they file, some are not. Many file to try and discharge condo or homeowner dues. Both homeowners and associations alike benefit, however, from knowing some bankruptcy basics, so consider this your “bankruptcy boot camp.” Today we’ll be reviewing some basic mechanics and terms that come up in a Chapter 7 bankruptcy case, plus the impact of an owner’s bankruptcy filing on the owners’ association. Bankruptcy is a federal law that helps people get breathing room from creditors, and a fresh start free from most of their debts, all in an organized process with oversight from the federal bankruptcy court. The most common type of bankruptcy is a Chapter 7 case, so named because it is filed according to Chapter 7 of the United States Bankruptcy Code. Also known as a “liquidation” or “straight” bankruptcy, the goal of a Chapter 7 is to provide recovery for creditors where possible. However, the majority of Chapter 7 cases are “no-asset” cases, meaning that there is no money or property to be distributed to creditors. Many Chapter 7 bankruptcy cases are the result of job loss or unemployment, divorce, or major medical issues. In exchange for ultimately getting a “discharge,” or an order from the court that forgives most debts, a bankruptcy filer must file lengthy documents with the bankruptcy court that contain every detail about their property, debt, income, and expenses. In a Chapter 7 case, the bankruptcy judge’s role is often quite limited. At the start of a case, a professional called the bankruptcy “trustee” is appointed. Chapter 7 trustees are usually attorneys or accountants who have specialized experienced in this area. Trustees receive a percentage of money that is paid out to creditors, or in cases where they do not distribute money, they are paid a fixed fee from the bankruptcy filing fee. The trustee handles a variety of tasks but ultimately any litigation in a bankruptcy case is dealt with by the bankruptcy judge. The instant someone files for bankruptcy, something called the “automatic stay” goes into effect. The simplest way to think of the “stay” is as a restraining order that keeps creditors from taking any action on account of existing debts. The person filing bankruptcy does not have to do anything special other than filing their bankruptcy case to be protected by the “stay.” Condo and homeowner associations can ask the bankruptcy court for what is called “relief” from the stay. Once the bankruptcy court has granted an association relief from the stay, the association can return to doing whatever it could do before the bankruptcy case is filed. Every case we handle is a little bit different, and sometimes a “motion for relief” is not cost-effective, so be sure to talk to your attorney! Different debts are treated differently by the bankruptcy laws, depending on the type of debt and the circumstances of each case. Common debts that are not generally discharged are recent taxes, student loans, and child support. As far as condo and homeowner associations, the bankruptcy law was changed in 2005 to keep Chapter 7 bankruptcy filers from discharging, or wiping out, post-bankruptcy assessments. This is a major change from the bankruptcy law pre-2005, which allowed owners to escape liability just by moving out of the property (or if their tenants moved out and stopped paying rent). A Chapter 13 case is an entirely different “animal” and we’ll cover that in a future blog post. Usually, a Chapter 7 case is over approximately 3-4 months after the time the case is filed. We encourage our clients to get bankruptcy notices to us ASAP since a typical bankruptcy case is over so quickly! If the bankruptcy trustee discovers assets then the case can stay open for anywhere from 6 months to a year, or even longer. Once a condo owner or homeowner receives an order from the bankruptcy court discharging their debts, the association can no longer take any action against the bankruptcy filers to collect assessments which were outstanding as of the date the bankruptcy case was filed. However, if the association has filed a lien, it may foreclose on its lien, but it can never ask the court for a judgment against those owners. With the growth of Condominium Law Group, we are excited to welcome several new attorneys who are new to our firm and who have extensive experience practicing in bankruptcy. They are eager to help so please contact us with your questions. We look forward to providing some information about Chapter 13 bankruptcies in a future blog post!