How Community Association Assessments Are Treated in Bankruptcy

If you’re behind on your homeowners’ association assessments – and if you’re thinking about filing bankruptcy – then make sure you read this article before you file.

For discussion, let’s say you’re behind $15,000 in your assessments.

As soon as you file bankruptcy, the court imposes an automatic stay.  This automatic stay immediately stops all collection efforts by your creditors.  This means your community association can no longer legally send any collection letters to you – or take any other kind of action against you.  The association’s collection efforts are stopped and cannot resume until the bankruptcy court lifts or terminates the stay.

Beware:  Since your assessments are due each month, the court’s automatic stay applies to all assessments up to the date you filed bankruptcy.  The stay does not apply to monthly assessments that come due after the date you filed.  As a result, even while your case is in bankruptcy court, you are liable for paying all assessments that are due after the date you filed bankruptcy.

Because these debts arose after the date you filed bankruptcy, they are called post-petition debts.  If you don’t pay these new monthly assessments, the association can ask the court to “lift the automatic stay”, allowing it to pursue you for these new assessments.  And if your bankruptcy case has already ended, the association can come after you for these debts as if you had never filed bankruptcy.

The association’s likelihood of collecting assessments depends on which type of bankruptcy you file, Chapter 7 or Chapter 13.  What’s more, if you file a Chapter 13 bankruptcy, the court will also look at whether the debts are secured, usually by a lien recorded against your home.

Under Chapter 7, your assets are liquidated and the proceeds are used to pay off your creditors.  Under Chapter 13, you create a repayment plan to pay all or some of your debts over a specific period of time.

If you file under Chapter 7, the association will not likely collect any assessments prior to your date of filing.  In this case, your debts will be discharged, which means you do not have to pay the assessments that came due before you filed bankruptcy.  However, the assessments that came due after the date you filed bankruptcy are still due because your bankruptcy has no effect on them.  And if you get behind in your post-petition debts, the association can once again take collection action against you.

If you file under Chapter 13, the association will likely collect the pre-petition assessments that are secured by your real estate, in a payment plan that can last up to five years.  While your bankruptcy case is open, the association must file a proof of claim, detailing all of the assessments you owed before you filed bankruptcy.  This proof of claim outlines the secured and unsecured amounts you owe the association.

The secured debts are those that have been recorded against your property.  For the unsecured debts, the association’s ability to collect depends on whether you have any money left after your secured debts have been paid, which is not likely.

After you have made all the payments in your plan, any debts that remain unpaid are usually discharged, leaving you with no further obligation.