HOAs & Bankruptcy, Foreclosure, and Workouts Text Size:

Sometimes, real property owners fall on hard times and they default on some type of a payment that's owed on their property. Usually, the creditor can either take action to enforce and collect the debt, such as foreclosing on a lien, or the property owner and the creditor can make a deal to settle the matter, which is called a "workout." Sometimes, a property owner has to declare bankruptcy.

All of these things can happen when the property is part of a homeowners' association (HOA). And, anyone who's a member of an HOA, should know how their HOA will react in such circumstances. Often, a HOA will be aggressive in collection actions when assessments and dues go unpaid, because it's simply not fair to other owners to shoulder the financial responsibility of a non-paying HOA member.

Bankruptcy

The bankruptcy laws are very complex, but generally they're designed to give you some relief from your debts. In a Chapter 7 bankruptcy proceeding, some or all of your personal assets are sold, the proceeds are used to pay your creditors, and your debts are erased. In Chapter 13 bankruptcy, you devise a plan to pay off your creditors over a period of time, usually between three to five years.

As the owner of a condo or home that's part of an HOA, you might be falling behind on your HOA fees or assessments. In such cases, the HOA is likely first to try to collect the unpaid fees. If that's not successful, the HOA is likely to place a lien against your home for those unpaid fees, and then "foreclose" lien, that is, take your property as payment for the fees. The HOA's board of directors might take action even if you've only missed a couple of payments-a mounting account balance will not go unnoticed.

If you file for bankruptcy protection, there's an automatic stay, which immediately stops all debt collections and foreclosures against you, including the HOA's attempts to collect the unpaid fees. However, if the HOA has a lien against your property before you file for bankruptcy protection, and you file under:

• Chapter 7, then the lien will not be erased (because it's a "secured" debt, which means your home is collateral or a guarantee for repayment of the lien), but most of other debts will be erased, like credit card debts and medical bills.
• Chapter 13, and you included the HOA's lien as part of your 3-5 year repayment plan, and you make all of your scheduled payments under the plan, then the HOA can't do anything at all because the lien was paid off as part of your 3-5 year repayment plan. However, if you don't repay the debt as agreed to in the plan, the HOA can have the automatic stay removed and begin foreclosure proceedings to collect the debt.

As you can see, if you're in this situation, it may be better for you to file a Chapter 13 bankruptcy, as that way you repay the debt owed to the HOA and you can keep your house. A Chapter 7 bankruptcy will only buy you some time to work out some sort of deal with the HOA, but it won't stop a foreclosure indefinitely.

Foreclosure

Foreclosure is when a creditor, like an HOA if it has a lien against your property for unpaid HOA fees, takes your property as payment for the fees. Generally, you can stop a foreclosure immediately by paying all the fees that you owe to the HOA.

If you can't or don't pay the fees or file for bankruptcy, there are two types of foreclosure actions that your HOA might use:

• Non-judicial foreclosure, which allows the HOA to take your property and sell it at auction without a court order. This type of foreclosure by HOAs is allowed in only some states, including California.
• Judicial foreclosure, which requires the HOA to go to court and get an order authorizing it to sell your property, but only after the HOA gives you notice of the non-payment or lien and a certain amount of time to "cure" the default by paying the fees or assessments that you owe

The laws on foreclosure vary from state to state, so be certain to check the laws in your area to make sure that your legal rights are protected if your HOA attempts to foreclose on a lien.

Workouts

It's not uncommon for HOAs to foreclose on a lien for unpaid fees and assessments, even if your debt amounts to only a few hundred dollars-remember, these are your fellow owners and neighbors, and the failure of an owner to pay his share of the common expenses is unfair to the group. However, it's likely that the HOA will agree to an arrangement like a payment plan to allow you to catch up on the amount you owe over time. This solution will save the expenses that come with foreclosure.

For example, you could arrange a monthly payment plan that consists of the regular monthly fee, plus an amount to be applied towards the arrears, so that you stay current on the regular fee and pay off the arrears over the course of one year.

In any event, the best advice is to pay your HOA fees on time. If you have a question about whether a fee is legitimate or too large, ask the HOA about it. If you can't afford the payments, try to work out a plan with the HOA before it begins foreclosure proceedings. Of course, if the HOA doesn't give you a good explanation about a fee or assessment, if you find that bankruptcy is your only alternative, or if a foreclosure action has already begun, you should contact an experienced bankruptcy or real estate attorney as soon as possible.

Questions for Your Attorney

• If I file bankruptcy but I'm not in arrears on my HOA fees, should I list the HOA as a creditor?
• I was behind in my HOA fees, and as soon as my HOA notified me that it was going to place a lien on my condo, I made arrangements with them to pay the arrears over time. Even though I've been making payments as promised, the HOA went ahead and filed a lien anyway. Can it do that?
• My HOA placed a lien on my home for unpaid fees. I paid the fees in full, but the HOA hasn't removed the lien. What can I do?

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