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How Bankruptcy Affects Homeowners Associations (HOAs)
Bankruptcy can have significant financial implications for Homeowners Associations (HOAs), as it directly impacts assessment payments and community funding. When homeowners file for bankruptcy, the HOA becomes one of their creditors, which can lead to financial uncertainty for the association.
Understanding how different types of bankruptcy filings impact HOA dues can help communities navigate these challenges effectively.
How Does Bankruptcy Impact an HOA?
HOAs rely on monthly assessments from homeowners to cover maintenance, amenities, and community management costs. When a homeowner files for bankruptcy, the HOA must determine:
- Can past-due assessments still be collected?
- Are future HOA dues affected?
- What legal steps should the HOA take to protect its financial interests?
The impact on the HOA depends on the type of bankruptcy the homeowner files.
Types of Bankruptcy Filings & Their Impact on HOA Fees
The most common types of bankruptcy filed by homeowners are Chapter 7 and Chapter 13.
|
Bankruptcy Type |
Key Details |
Impact on HOA Fees |
|
Chapter 7 (Liquidation Bankruptcy) |
Homeowners surrender assets to eliminate unsecured debt. |
If the homeowner keeps their home, they must continue paying HOA fees. If they surrender their home, past-due assessments may be discharged. |
|
Chapter 13 (Reorganization Bankruptcy) |
Homeowners restructure debt to pay it off over time. |
Post-filing HOA fees may be dischargeable, meaning the HOA may not collect on certain debts. |
HOAs should consult with legal professionals before pursuing collection efforts, as bankruptcy laws vary by state and case details.
What Happens When a Homeowner Files for Chapter 7 Bankruptcy?
If the homeowner keeps their home:
- They must continue paying HOA dues, including outstanding fees.
- The HOA can collect unpaid dues accumulated after the bankruptcy filing.
If the homeowner surrenders their home:
- The HOA may not be able to collect past-due assessments before the filing date.
- Some homeowners sell their homes before filing bankruptcy to avoid HOA-related financial obligations.
What Happens When a Homeowner Files for Chapter 13 Bankruptcy?
- HOA fees after the bankruptcy filing may be dischargeable.
- HOAs can file a proof of claim during the bankruptcy proceeding to request payment for:
- Past-due assessments
- Legal fees associated with collections
However, homeowners may dispute these claims based on state and federal bankruptcy laws.
How Should HOAs Handle Homeowner Bankruptcies?
Be Cautious with Fees & Legal Charges
- Bankruptcy courts can dismiss HOA fees they consider unfair.
- Improper assessments could be rejected by the court, leaving the HOA unpaid.
Negotiate Before Bankruptcy Occurs
- If a homeowner is struggling with payments, the HOA should attempt to work out a payment plan before they file for bankruptcy.
- If bankruptcy is filed after a foreclosure starts, the foreclosure will be put on hold until bankruptcy proceedings are complete.
Consult Legal & HOA Management Professionals
- Bankruptcy laws vary by state and require legal expertise.
- HOA management companies can help boards navigate the financial and legal implications of homeowner bankruptcy.
Partner with RealManage for HOA Legal & Financial Guidance
RealManage is an HOA and Condo management company that focuses on safeguarding HOA's interests. We're proud to partner with communities across several states, including North Carolina, Colorado, Florida, Texas, Illinois, Washington, and California. We possess the expertise and skills necessary to help HOAs navigate the intricate world of bankruptcy filing as well as other legal maneuvers.
To learn more about our company and how we can be of help to your community, Contact Us today!
