So you get a notice that an owner has filed for Chapter 13 bankruptcy. What to do? If you said, “close the file and write off the balance,” not so fast! Here are 5 things that every manager and board should keep in mind.
- Deadlines Pass by Quickly. Bankruptcy court is efficient and fast, at least compared with the typical timeline in state court. If you receive a notice that an owner has filed for bankruptcy, send the notice to the association's attorney right away. Authorize legal counsel to conduct a thorough review of all documents filed in the bankruptcy case, as a variety of things that come up in a bankruptcy case can affect your association's rights and ability to collect.
- Chapter 13 May Mean Repayment. Don’t just read the word “bankruptcy” and write off the balance! In a Chapter 13 bankruptcy case, an owner can submit a “save the house” repayment plan that repays mortgages, condo and homeowner associations, plus keeps up the regular payments.
- Sometimes They Surrender. Owners can also “surrender” property in their Chapter 13 repayment plan if they cannot afford to make the payments. The property does not legally change ownership as a result, but the association may have to make a decision about whether to wait for the lender to foreclose, or whether to get permission from the bankruptcy court to start its own foreclosure. Typically the association will not receive any payments from the court or trustee if the property is surrendered. It is important to consult with your attorney in situations like these for advice on the best approach to take.
- Fairness is the Name of the Game. In a garden-variety foreclosure lawsuit, judges by and large understand that late fees, costs, interest, and attorneys' fees are all part of collecting from delinquent owners. However, in bankruptcy court the main theme is “fairness.” If the debtor/owner is already in dire financial straits, the bankruptcy court is empowered to help them out. Sometimes this means the association will not be paid everything it is entitled to. And while that may not seem (or be!) fair to the association, the bankruptcy court is more heavily weighted in favor of fairness to the debtor.
- Relief From Stay. An owner who files for bankruptcy is, the second that they file, protected automatically from collection action and from initiating or continuing a lawsuit. This is called “the stay.” Generally speaking, the association cannot do anything without getting bankruptcy court permission to go back to whatever it was doing before, even if that means doing nothing. It can be expensive to get bankruptcy court orders allowing an association to enforce its ordinary rights, but sometimes it is worth doing so.
If there's one lesson we want you to take away from our posts on bankruptcy, it's this: don't make assumptions. Whenever you get a notice that an owner has filed bankruptcy, consult with your association's attorney regarding what (if anything) should be done to protect the association's interests.
If you have any questions we can answer, please feel free to leave a comment or contact us directly. We look forward to continuing this conversation with you in our future posts!