Published in the ECHO Journal, March 2009
With the world’s economy in turmoil and a significant increase in the unemployment rate, experts are forecasting a big increase in the number of bankruptcy filings in 2009. If your association receives a Notice of Bankruptcy filing by one of its owners, don’t panic as there are some remedies. But you must take quick action to protect the association’s rights.
When the association receives a Notice of Bankruptcy, the association, or its legal counsel, should file a Proof of Claim to ensure that amounts due the association by the debtor (the delinquent homeowner who filed bankruptcy) are accounted for and that the court and all of the parties involved in the bankruptcy proceedings are aware of the association’s claim.
We have been told by bankruptcy judges that, notwithstanding what is stated in the Notice of Bankruptcy (where it is often stated that there is no need to file a Proof of Claim), all creditors (and the association is a creditor if it is owed assessment monies from the debtor/delinquent homeowner) should file a Proof of Claim as there is a possibility that the debtor/delinquent owner will convert their bankruptcy from one form to another where a Proof of Claim is required. It is a mistake for an association to believe that it can rely on the debtor to name the association as a creditor to whom money is due. If the debtor does not list the association as a creditor, and if the association fails to file a Proof of Claim, the result could be non-payment to the association by the bankruptcy estate,, which could result in the termination of the association’s right to collect payments (delinquencies) from the delinquent homeowner once the bankruptcy is discharged. Think of the Proof of Claim as a notice to all parties of the association’s right to payment.
Contained within the bankruptcy notice will be the date upon which the Proof of Claim must be filed. Normally, the Proof of Claim needs to be filed within 90 days after the date set for the meeting of the creditors (in a Chapter 7 bankruptcy). Our advice is to file the Proof of Claim as soon as possible after receiving the bankruptcy notice, keeping in mind that unsecured claims are usually paid last, if at all. Further, even if the homeowner files a Chapter 13 bankruptcy (as opposed to a Chapter 7), it is possible that the Chapter 7 can be converted to a Chapter 13 if the debtor/delinquent homeowner misstates their assets.
Alternatively, a Chapter 13 can be converted to a Chapter 7 bankruptcy if the debtor has lost or is unable to demonstrate their ability to repay their debts. Keep in mind that if a lien is recorded and a Proof of Claim is filed, the association is in a much better position to receive money on its secured claim for delinquent assessments; therefore do not delay having a lien recorded. Conversely, if a lien is not recorded and the association is an unsecured creditor, its debt will not be acknowledged until after the secured creditors, who will have a priority over the association’s unsecured claim, are paid.
Remember when filing a Proof of Claim that you list the outstanding assessments and also any late fees, interest and collection costs (including attorneys fees) owed by the debtor up to the date the debtor filed for bankruptcy. The are known as “pre-petition assessments.” Post-petition assessments, those that become due after the bankruptcy petition is filed, must be kept current by the debtor so long as he/she is the legal, equitable or have possessory ownership interest in the property. If the homeowner fails to pay post-petition assessments, the association can seek relief from the automatic stay in the Bankruptcy Court. If your request for relief from the automatic stay is granted by the Court, the association could commence collection efforts against the debtor for failure to pay the post-petition assessments including, but not limited to, recordation of a lien and, if necessary, foreclosure proceedings.
While bankruptcy is an obstacle to collection, it is not insurmountable. Associations that are dealing with bankruptcies need to work closely with their attorneys to avoid making mistakes.
Sandra Gottlieb and David Swedelson are partners in the community association law firm of Swedelson & Gottlieb and are principals of Association Lien Services, with offices throughout Northern and Southern California. Their firm is a member of ECHO and Ms. Gottlieb is a frequent speaker at ECHO events.