By: Christopher R. Moore, Esq.
The United States Bankruptcy Code (11 U.S.C. §§ 101, et seq) is immensely complicated, but, for homeowners associations, the important thing to know is that, if a member files bankruptcy, the association cannot take any actions to collect assessments subject to the bankruptcy case, including filing liens or civil complaints, while the case is pending or until the court issues an order lifting the “automatic stay.” 11 U.S.C. § 362.
Violations of the automatic stay can result in penalties imposed by the bankruptcy court, including, at minimum, having to return money or release a lien.
The dischargability of a debtor’s liability of assessments is subject to certain exceptions outlined under 11 U.S.C. §§ 1328(a) and 523(a)(16). If a member receives a “discharge” (an order from the bankruptcy court legally absolving a debtor of the obligation to pay certain debts), then, for all intents and purposes, any debts subject to the discharge are no longer owed. So, if a member has delinquent assessments going back two years, files bankruptcy, and receives a discharge, the member no longer has any legal obligation to pay those assessments.
Importantly, the debts subject to a discharge are debts in existence at the time the bankruptcy case was filed – not at the time of the discharge. As a result, if new assessments come due after the member filed, but before the discharge is entered, the member is liable for the new assessments but not for any assessments arising prior to filing.
If an association has a lien in place, it may still be able to recover the related assessments even though the member no longer legally owes the money. This is because a lien is considered an obligation of the real estate itself – not the owner personally – so a lien can survive the discharge of the debt that gave rise to the lien.
In that scenario, the association cannot attempt to collect discharged assessments from the owner, such as by filing a civil complaint seeking a personal judgment or even by sending a letter asking for payment. However, the association can seek to enforce the lien, such as by foreclosing, as long as the stay is no longer in effect.
A bankruptcy court can order a lien to be released, a common occurrence when the total encumbrances on the property exceed its fair value. But, otherwise, a lien survives a bankruptcy discharge and must be paid off if the property owner wants to sell or refinance in the future (unless the lien terminates for some other reason).
READ THE BANKRUPTCY CODE
| CHAPTER NAME | CHAPTER NUMBER |
|---|---|
| General Provisions (Sections 101 To 112) | Chapter 1 |
| Case Administration (Sections 301 To 366) | Chapter 3 |
| Creditors, The Debtor, And The Estate (Sections 501 To 562) | Chapter 5 |
| Liquidation (Sections 701 To 784) | Chapter 7 |
| Adjustment Of Debts Of A Municipality (Sections 901 To 946) | Chapter 9 |
| Reorganization (Sections 1101 To 1195) | Chapter 11 |
| Adjustment Of Debts Of A Family Farmer Or Fisherman With Regular Annual Income (Sections 1201 To 1232) | Chapter 12 |
| Adjustment Of Debts Of An Individual With Regular Income (Sections 1301 To 1330) | Chapter 13 |
| Ancillary And Other Cross-Border Cases (Sections 1501 To 1532) | Chapter 15 |
RELATED COURT CASES
The following bankruptcy cases address the dischargeability of an owner’s liability for assessments. These bankruptcy cases are just a few examples of how the courts have ruled on the topic of dischargeability and is not intended to be the resource for everything you need to know about bankruptcy (for that we commend consulting with a qualified bankruptcy attorney in your area).
CHAPTER 7 CASES
In re Raymond, 129 B.R. 354, 365 (Bankr. S.D.N.Y. 1991). The issue presented to the court was whether the debtor is liable for the condominium common charges accrued post-petition. The court determined that condo association fees that accrued post-discharge were non-dischargeable. The court further concluded that the association “did not violate the discharge injunction of Code § 524(d) through its attempt to collect a debt for condominium common charges, assessments and late fees which accrued subsequent to the Debtors’ discharge.”
River Place E. Hous. Corp. v. Rosenfeld (In re Rosenfeld), 23 F.3d 833 (4th Cir. 1994). The issue presented to the court was whether a discharge in bankruptcy relieves a debtor from personal liability for post-petition assessments of cooperative housing dues. The bankruptcy court held that post-petition assessments arise from a pre-petition contract and are therefore included in the discharge. The district court reversed and concluded that a cooperative's right to payment of post-petition dues does not arise until the dues are assessed and were not discharged. The Fourth Circuit Court of Appeals affirmed the district court’s decision holding that post-petition assessments were not discharged because the obligation to pay cooperative association assessments ran with the land and arose each month from the debtor’s continued ownership of the property.
CHAPTER 11 CASES
In re Burgueno, 451 B.R. 1, 3-4 (Bankr. D. Ariz. 2011). The issue presented was whether an individual debtor remains liable for post-petition homeowner association assessments and attorneys' fees even though he does not occupy the property and stipulated to stay relief so the lender could foreclose. The court concluded that “[b]ecause stay relief does not transfer legal title…the post-petition homeowner association ("HOA") fees, and the legal fees incurred in litigating them, are nondischargeable pursuant to Code § 523(a)(16).”
CHAPTER 13 CASES
Foster v. Double R Ranch Ass’n (In re Foster), 435 B.R. 650, 659 (B.A.P. 9th Cir. 2010) (Chapter 13 action). The Debtor filed an adversary proceeding against the association seeking a declaration that postpetition homeowners' association dues he owed to the association were debts dischargeable under § 1328(a). The court held that “[u]nder Washington law, the affirmative covenant to pay HOA dues is not contractual, but is a covenant running with the land. As such, debtor's personal liability for the dues is an incidence of ownership of his property not affected by the filing of his bankruptcy.” In addition, the court stated: “we doubt the omission of § 1328(a) in § 523(a)(16) or vice versa evinces a legislative intent to discharge postpetition HOA dues under § 1328(a) when the debtor uses the cure and maintenance provisions under chapter 13 to stay in his or her property after the order for relief.”
Otter Creek Homeowners’ Ass’n v. Davenport (In re Davenport), 534 B.R. 1, 3-4 (Bankr. E.D. Ark. 2015) (Chapter 13 action). The homeowners association filed a complaint to determine dischargeability of debt and declaratory relief seeking to determine if postpetition homeowners' association fees and assessments owed by the Chapter 13 debtor are dischargeable. The court held that the debtor's postpetition homeowners' association fees and assessment are nondischargeable.
Goudelock v. Sixty-01 Association of Apartment Owners, 895 F.3d 633 (9th Cir. 2018) (Chapter 13 action). Goudelock appealed the district court's affirmance of the bankruptcy court's grant of summary judgment in favor of the condominium association. The issue considered in the appeal was whether condominium association assessments that become due after a debtor has filed for bankruptcy under Chapter 13 of the Bankruptcy Code are discharged upon confirmation of the plan. The Ninth Circuit ruled that condominium association assessments that become due after a debtor has filed for bankruptcy under Chapter 13 of the Bankruptcy Code are discharged upon confirmation of the plan pursuant to 11 U.S.C. § 1328(a).
