Chapter 13 Bankruptcy: 5 Things You Need to Know

So you get a notice that an owner has filed for Chapter 13 bankruptcy.  What to do?  If you said, “close the file and write off the balance,” not so fast!  Here are 5 things that every manager and board should keep in mind.

  1. Deadlines Pass by Quickly.  Bankruptcy court is efficient and fast, at least compared with the typical timeline in state court.  If you receive a notice that an owner has filed for bankruptcy, send the notice to the association’s attorney right away.  Authorize legal counsel to conduct a thorough review of all documents filed in the bankruptcy case, as a variety of things that come up in a bankruptcy case can affect your association’s rights and ability to collect.
  2. Chapter 13 May Mean Repayment.  Don’t just read the word “bankruptcy” and write off the balance!  In a Chapter 13 bankruptcy case, an owner can submit a “save the house” repayment plan that repays mortgages, condo and homeowner associations, plus keeps up the regular payments.
  3. Sometimes They Surrender.  Owners can also “surrender” property in their Chapter 13 repayment plan if they cannot afford to make the payments.  The property does not legally change ownership as a result, but the association may have to make a decision about whether to wait for the lender to foreclose, or whether to get permission from the bankruptcy court to start its own foreclosure.  Typically the association will not receive any payments from the court or trustee if the property is surrendered.  It is important to consult with your attorney in situations like these for advice on the best approach to take.
  4. Fairness is the Name of the Game.  In a garden-variety foreclosure lawsuit, judges by and large understand that late fees, costs, interest, and attorneys’ fees are all part of collecting from delinquent owners.  However, in bankruptcy court the main theme is “fairness.”  If the debtor/owner is already in dire financial straits, the bankruptcy court is empowered to help them out.  Sometimes this means the association will not be paid everything it is entitled to.  And while that may not seem (or be!) fair to the association, the bankruptcy court is more heavily weighted in favor of fairness to the debtor.
  5. Relief From Stay.  An owner who files for bankruptcy is, the second that they file, protected automatically from collection action and from initiating or continuing a lawsuit.  This is called “the stay.”  Generally speaking, the association cannot do anything without getting bankruptcy court permission to go back to whatever it was doing before, even if that means doing nothing.  It can be expensive to get bankruptcy court orders allowing an association to enforce its ordinary rights, but sometimes it is worth doing so.

If there’s one lesson we want you to take away from our posts on bankruptcy, it’s this: don’t make assumptions.  Whenever you get a notice that an owner has filed bankruptcy, consult with your association’s attorney regarding what (if anything) should be done to protect the association’s interests.

If you have any questions we can answer, please feel free to leave a comment or contact us directly.  We look forward to continuing this conversation with you in our future posts!

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2 Responses to Chapter 13 Bankruptcy: 5 Things You Need to Know
  1. Patricia
    November 21, 2011 | 1:04 pm

    What can be done when a homeowner refuses to pay future dues because they are in chpt 13? It is expensive to request payment from bankruptcy court.

  2. Valerie Farris Oman
    November 21, 2011 | 2:58 pm

    Hi, Patricia,

    I’m unsure what you mean by “future dues.” It sounds like you may have an owner who believes being in bankruptcy means he/she does not have to pay the dues any longer for their unit – is that correct?

    In any case, often we spend our time in bankruptcy cases educating the debtors about their continuing obligation to pay dues so long as they own the unit. In both Chapter 7 and Chapter 13 bankruptcies, when an owner is surrendering the unit to the bank, the bankruptcy can discharge the owner’s liability for all debt that accrued UP TO THE DATE THEY FILED BANKRUPTCY. What many debtors don’t understand is that they remain legally responsible for all assessments against the unit from the date they file bankruptcy until title to their property changes hands.

    In other words, SAYING in your bankruptcy documents that you are surrendering your property to the bank does not mean title to the property changes hands. And until that happens, the owner/debtor remains liable for the assessments.

    As for what you can do if this is the situation you’re in, my best advice is to retain an attorney experienced in community association law AND experienced in dealing with bankruptcy cases. Often one phone call or letter from such an attorney can accomplish more than hours of communication from Board members, managers, etc.

    I hope that helps!

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Chapter 13 Bankruptcy: 5 Things You Need to Know

So you get a notice that an owner has filed for Chapter 13 bankruptcy.  What to do?  If you said, “close the file and write off the balance,” not so fast!  Here are 5 things that every manager and board should keep in mind.

  1. Deadlines Pass by Quickly.  Bankruptcy court is efficient and fast, at least compared with the typical timeline in state court.  If you receive a notice that an owner has filed for bankruptcy, send the notice to the association’s attorney right away.  Authorize legal counsel to conduct a thorough review of all documents filed in the bankruptcy case, as a variety of things that come up in a bankruptcy case can affect your association’s rights and ability to collect.
  2. Chapter 13 May Mean Repayment.  Don’t just read the word “bankruptcy” and write off the balance!  In a Chapter 13 bankruptcy case, an owner can submit a “save the house” repayment plan that repays mortgages, condo and homeowner associations, plus keeps up the regular payments.
  3. Sometimes They Surrender.  Owners can also “surrender” property in their Chapter 13 repayment plan if they cannot afford to make the payments.  The property does not legally change ownership as a result, but the association may have to make a decision about whether to wait for the lender to foreclose, or whether to get permission from the bankruptcy court to start its own foreclosure.  Typically the association will not receive any payments from the court or trustee if the property is surrendered.  It is important to consult with your attorney in situations like these for advice on the best approach to take.
  4. Fairness is the Name of the Game.  In a garden-variety foreclosure lawsuit, judges by and large understand that late fees, costs, interest, and attorneys’ fees are all part of collecting from delinquent owners.  However, in bankruptcy court the main theme is “fairness.”  If the debtor/owner is already in dire financial straits, the bankruptcy court is empowered to help them out.  Sometimes this means the association will not be paid everything it is entitled to.  And while that may not seem (or be!) fair to the association, the bankruptcy court is more heavily weighted in favor of fairness to the debtor.
  5. Relief From Stay.  An owner who files for bankruptcy is, the second that they file, protected automatically from collection action and from initiating or continuing a lawsuit.  This is called “the stay.”  Generally speaking, the association cannot do anything without getting bankruptcy court permission to go back to whatever it was doing before, even if that means doing nothing.  It can be expensive to get bankruptcy court orders allowing an association to enforce its ordinary rights, but sometimes it is worth doing so.

If there’s one lesson we want you to take away from our posts on bankruptcy, it’s this: don’t make assumptions.  Whenever you get a notice that an owner has filed bankruptcy, consult with your association’s attorney regarding what (if anything) should be done to protect the association’s interests.

If you have any questions we can answer, please feel free to leave a comment or contact us directly.  We look forward to continuing this conversation with you in our future posts!

Share and Enjoy:
  • Print
  • Digg
  • StumbleUpon
  • del.icio.us
  • Facebook
  • Yahoo! Buzz
  • Twitter
  • Google Bookmarks
2 Responses to Chapter 13 Bankruptcy: 5 Things You Need to Know
  1. Patricia
    November 21, 2011 | 1:04 pm

    What can be done when a homeowner refuses to pay future dues because they are in chpt 13? It is expensive to request payment from bankruptcy court.

  2. Valerie Farris Oman
    November 21, 2011 | 2:58 pm

    Hi, Patricia,

    I’m unsure what you mean by “future dues.” It sounds like you may have an owner who believes being in bankruptcy means he/she does not have to pay the dues any longer for their unit – is that correct?

    In any case, often we spend our time in bankruptcy cases educating the debtors about their continuing obligation to pay dues so long as they own the unit. In both Chapter 7 and Chapter 13 bankruptcies, when an owner is surrendering the unit to the bank, the bankruptcy can discharge the owner’s liability for all debt that accrued UP TO THE DATE THEY FILED BANKRUPTCY. What many debtors don’t understand is that they remain legally responsible for all assessments against the unit from the date they file bankruptcy until title to their property changes hands.

    In other words, SAYING in your bankruptcy documents that you are surrendering your property to the bank does not mean title to the property changes hands. And until that happens, the owner/debtor remains liable for the assessments.

    As for what you can do if this is the situation you’re in, my best advice is to retain an attorney experienced in community association law AND experienced in dealing with bankruptcy cases. Often one phone call or letter from such an attorney can accomplish more than hours of communication from Board members, managers, etc.

    I hope that helps!

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Trackback URL http://www.condolawgroup.com/2011/08/30/chapter-13-bankruptcy-5-things-you-need-to-know/trackback/