Q&A: When a Unit Owner Declares Bankruptcy

Q.  What can be done if a unit owner – who has not paid his or her assessments for a year and owes the association a substantial amount of money – has now declared bankruptcy?  How does the association recover its money?  

—Concerned About Our HOA’s Financial Health

A. “Unfortunately, this type of situation has become far more common since the real estate market crash began in 2006-7,” says attorney Sheila D. Van Duyne of the Van Duyne Law Group in Reno. “In subsequent years, many homeowners were unable to meet their financial obligations and were forced to declare bankruptcy.  This placed a great burden on associations that were tasked with maintenance of common areas.  

“Bankruptcy, however, should not be viewed as something that completely negates an association’s ability to collect from an owner.  Given that assessments are viewed as secured debt either by way of the CC&Rs [covenants, conditions & restrictions] acting as a de facto lien and/or by the recordation of a lien, association debt will typically be treated as secured debt.  It is far better to be a secured creditor in a bankruptcy proceeding than an unsecured creditor (such as a credit card company) because secured creditors are paid first out of any available money.

“There are three types of common bankruptcies: Chapter 7 (personal bankruptcy, probably the most common); Chapter 11 (complex business reorganization); and Chapter 13 (wage earner debt reorganization.)    

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