What are the differences and what do they mean to your community association?
Chapter 7 (complete discharge):
If the homeowner fulfills all of the requirements of Chapter 7, he gets a complete discharge from all “pre-petition” association assessments and related fees.
All association assessments (including late fees, interest, etc) which accrue after the date of the homeowner’s Chapter 7 petition, are non-dischargeable in bankruptcy.
Most Chapter 7 bankruptcies are completed within 4-5 months. When the homeowner gets a Chapter 7 discharge, the association may then contact its attorney to begin the collection process.
If the homeowner does not fulfill all of the requirements for a Chapter 7 discharge (which is not uncommon), the Bankruptcy Trustee will file a motion with the Bankruptcy Court to dismiss the homeowner’s case. If the order is granted, the association attorney may then begin the collection process for all (pre and post-petition) unpaid association assessments, late fees, interest, etc.
Chapter 13 (re-payment plan):
If the homeowner files for Chapter 13 protection, you should immediately notify the association attorney. GOOD NEWS! In most cases, because of the lien created by the association’s Declaration of Covenants, Conditions and Restrictions, and/or Master Deed (for condo’s), the association is treated as a “secured creditor”. As such, the association will most likely receive monthly payments as a part of the homeowner/debtor’s re-payment plan once the plan is confirmed.
To ensure that the association participates as a secured creditor in the re-payment plan, the association’s attorney must file a Proof of Claim with the Bankruptcy Court. In most cases, after the Proof of Claim is filed and the homeowner/debtor’s re-payment plan is confirmed by the Bankruptcy Court, the association will begin to receive payments for the delinquent and ongoing association assessments.
Any time bankruptcy is involved there is never a guarantee that the association will receive 100% of the delinquent and unpaid assessments from the homeowner. It is essential for the association to have an attorney who is knowledgeable in bankruptcy law to ensure that the association has the best chance of recovery after the homeowner files bankruptcy.
If the association was fortunate enough to have filed a Notice of Lien before the homeowner filed bankruptcy, all is not lost. See the next edition of “What Happens Now?” for how the association may be able to recover 100% of the unpaid assessments and related fees.