Delinquent assessments are unfortunately a frequent and practically universal problem for condominium associations. The collection of delinquent assessments is essential to the viability of any condominium association; however, these collection efforts can become problematic when a co-owner files for bankruptcy. This Article will address the two common types of consumer bankruptcies filed by co-owners, those being Chapter 7 and Chapter 13, as well as the bankruptcy filing’s affect on an Association’s ability to collect these delinquent assessments.
The Automatic Stay
Regardless of the type of bankruptcy filed, upon the filing of the bankruptcy petition an “automatic stay” is immediately and automatically put in place by the Bankruptcy Court. This automatic stay prohibits all creditors, including condominium associations, from proceeding with any and all collection activity against the co-owner or the co-owner’s assets (for example, their unit) without first obtaining permission from the bankruptcy court. The types of collection activities that are covered by the automatic stay include, without limitation, sending demand letters, filing liens, brining suits, or initiating foreclosure proceedings. Whether a bankruptcy court will eventually permit such activity will depend on the type of bankruptcy filed and the debtor’s proposed intentions as it relates to their property and the payment of assessments.
Discharge
A debtor who successfully completes a Chapter 7 or a Chapter 13 bankruptcy receives a discharge. This discharge wipes out all personal obligations as it relates to pre-petition debts (i.e. those debts which accrued prior to the bankruptcy petition filing date). Even though a discharge relieves a co-owner of their obligation to pay pre-petition debts, a condominium association still has a statutory lien on the co-owner’s unit for these pre-petition amounts and, accordingly, can proceed with collection of these amounts against the co-owner’s unit through foreclosure. The effect of a discharge on post-petition assessments varies depending on the type of bankruptcy filed, and will be addressed in detail later in this article.
Chapter 7 Bankruptcy
A chapter 7 bankruptcy is often referred to as a “liquidation” or “wipe-out” bankruptcy as the co-owner will typically surrender all of their non-exempt assets, if any, and will in turn receive an order of discharge as it relates to the co-owner’s obligation to pay pre-petition debts. It typically takes approximately four to six months from the date of filing the bankruptcy petition for a co-owner to obtain a discharge, although this time frame can certainly be longer if the co-owner has significant assets for the trustee to administer.
Pre-Petition Arrearages
The entry of a discharge order discharges the co-owner’s personal obligation to pay pre- petition arrearages and precludes condominium associations from making any attempts to seek collection of these arrearages directly from the co-owner. Nonetheless, this discharge does not affect the Association’s statutory lien and the association can therefore proceed with collection of these pre-petition amounts through the foreclosure of its lien against the co-owner’s unit. This right to foreclose ultimately has the effect of requiring payment by the co-owner of these pre-petition arrearages if the co-owner wants to keep their unit.
The bankruptcy code also provides the co-owner with an opportunity to “reaffirm” these pre-petition arrearages through a “reaffirmation agreement” even though they might otherwise be dischargeable by the bankruptcy. A reaffirmation agreement is essentially the co-owner’s voluntary written agreement to not have these pre-petition arrearages personally discharged and to repay the pre-petition arrearages pursuant to terms agreed upon by both the association and the co-owner. A co-owner’s desire to keep their unit and avoid foreclosure of the association’s lien is often the incentive for their agreement to reaffirm their debt to the association.
Post-Petition Assessments
The Bankruptcy Code provides an exception to discharge for post-petition Association assessments (i.e. those assessments accruing subsequent to the date that the co-owner filed for bankruptcy). Specifically, a Chapter 7 discharge does not discharge a co-owner’s obligation to pay post-petition assessments for so long as the co-owner has title to the unit and regardless of whether the co-owner intends to “surrender” the unit to the first mortgagee, which is often the stated intent for co-owners whose mortgages are greater than the value of the co-owner’s unit. As such, an association has every right to collect these post-petition assessments from the co-owner personally or through foreclosure of the association’s lien. It must be noted, however, that even though the Association is entitled to collect these post-petition amounts personally from the co- owner, the Association cannot seek collection from the co-owner for these amounts until the Chapter 7 case is closed or unless the association receives permission from the bankruptcy court prior to such closing.
Chapter 13 Bankruptcy
When a co-owner files a Chapter 13 bankruptcy petition, the co-owner seeks to reorganize their debts and pay back their creditors. Unsecured creditors (i.e. those creditors whose claims are not secured by collateral of the co-owner) typically receive a small percentage of what is owed on these unsecured debts. Secured creditors, on the other hand, often receive all amounts owed on the secured debt if the co-owner intends to retain the secured collateral.
If the co-owner intends to retain their unit, the co-owner’s Chapter 13 reorganization plan must provide for the payment of all pre-petition arrearages, which may include, among other things, delinquent assessments and those costs and fees incurred in collecting those assessments, if any, as well as the payment of continuing post-petition assessments. These payments are typically made by the co-owner to the Chapter 13 Trustee who then distributes these payments to creditors in accordance with the co-owner’s Chapter 13 plan. Chapter 13 plans typically last from three to five years. Assuming the co-owner makes all payments as required by the Chapter 13 plan, all pre-petition arrearages and all post-petition assessments will have been paid to the association during the Chapter 13 plan period. The Association will need to file a “Proof of Claim” in the bankruptcy case itself in order to provide the Bankruptcy Trustee and the co-owner of the accurate pre-petition arrearage amount as well as the continuing assessment amount. It is important to note that many of the Bankruptcy Rules are undergoing changes effective on December 1, 2017. As of that date, creditors will now have only seventy (70) days after a Chapter 13 Bankruptcy is filed to file a Proof of Claim. This is a reduction in the time previously provided to creditors, so all efforts should be made to timely file an Association’s proof of claim as soon as possible. Furthermore, it may be more important for creditors to file objections to proposed Chapter 13 Plans if the treatment of their claims is different than what their filed proof of claim states. In the past, the model Chapter 13 Plans provided that the Trustee would take the proof of claim information for granted, and leave it to the debtor to object to the claim itself. Now, there will be more of a burden on creditors to ensure their proof of claim is being treated appropriately.
It must be noted that if there is any change in the assessment amount or if any additional and/or special assessments will be levied during the Chapter 13 plan period, proper notice must be given to the Bankruptcy Court of any such increases and/or additional/special assessment at least 21 days before the Bankruptcy Court will permit the changed assessment amount or additional/special assessment amounts to be paid via the Chapter 13 Trustee to the Association. If proper notice is not provided to the Bankruptcy Court, then the Association risks losing the difference between the increased assessment amount and the current amount. There is the additional risk of possibly losing out on the ability to recover those additional/special assessments as well. It is therefore important to alert your Association’s Counsel immediately upon any increase or additional/special assessment so that the proper paperwork can be filed with the Bankruptcy Court in a timely fashion.
If a co-owner does not intend to retain their unit, the Chapter 13 plan will indicate that the co-owner intends to surrender the unit thereby removing the unit from the bankruptcy estate. Consequently, the Bankruptcy Court will treat any claim for pre-petition arrearages submitted by the Association as an unsecured claim. The Association, like other unsecured creditors, will most likely only receive a small percentage of what is owed on these pre-petition debts. The U.S. District Court for the Eastern District of Michigan has held that, like a Chapter 7 case, discharge does not discharge a co-owner’s obligation to pay post-petition assessments for so long as the co-owner has title to the unit and regardless of whether the co-owner intends to “surrender” the unit to the first mortgagee. Therefore, as with a Chapter 7, an association has every right to collect these post-petition assessments from the co-owner personally or through foreclosure of the association’s lien, but only after the Chapter 13 case is closed or unless the association receives permission from the bankruptcy court prior to such closing.
Dismissals
If a co-owner’s Chapter 7 or Chapter 13 case is dismissed and the co-owner, consequently, does not obtain a discharge, the co-owner will remain personally liable for all pre-petition arrearages and post-petition assessments. Further, once a case is dismissed, the automatic stay is no longer in place and it is therefore not necessary for the association to seek permission from the Bankruptcy Court prior to moving forward with collection activities. A dismissal, in essence, has the same effect as if the co-owner had never sought bankruptcy protection in the first place. A case can be dismissed for several reasons, but most often occurs in a Chapter 7 case when the co-owner does not file the appropriate documentation or pay the appropriate fees, and in a Chapter 13 case when the co-owner does not abide by the terms of their Chapter 13 plan.
Collecting delinquent assessments is an essential but often difficult task. The difficulty in collecting assessments can be compounded when a co-owner files for bankruptcy protection. When a co-owner files a bankruptcy petition, associations must avoid violating the automatic stay through prohibited collection activities and must ensure that all arrearages and continuing assessments are properly addressed as permitted given the type of bankruptcy case filed.
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* Stephen M. Guerra is a Michigan Condominium Attorney and the managing partner of Makower Abbate Guerra Wegner Vollmer PLLC. Mr. Guerra focuses his practice primarily in the areas of Michigan Condominium Association and Michigan Homeowner Association law, corporate governance law, and real estate development and finance. Mr. Guerra currently sits on the Board of the Community Association Institute (CAI) Michigan Chapter, is a Member of CAI’s Legislative Action Committee, and is a member of National CAI and the Michigan Real Property Law Section. Mr. Guerra has authored articles for the CAI Michigan Chapter, Michigan Lawyer’s Weekly, and the Michigan Real Property Review, and has been a seminar presenter for the CAI Michigan Chapter and a roundtable presenter for the State Bar of Michigan’s Real Property Section.
* John Finkelmann is a Michigan Condominium Attorney and an associate at Makower Abbate Guerra Wegner Vollmer PLLC. Mr. Finkelmann focuses his practice primarily in the areas of Michigan Condominium Association and Michigan Homeowner Association law. Amongst many others, Mr. Finkelmann specializes in assessment collection, foreclosure litigation, bankruptcy, and general covenant enforcement. Mr. Finkelmann also has a Masters in Business Administration from Wayne State University and is admitted to the U.S. District Courts in Eastern and Western Michigan. Having previously lived in a Condominium Unit for a number of years, Mr. Finkelmann stridently advocates for the firm’s clients while also bringing a unique viewpoint and understanding of Association issues that have a tendency to arise.
