Fiduciary Obligation to Collect Assessments, Use of the Forcible Entry and Detainer Act and its Impact upon Associations

While few take pleasure in pursuing their neighbors, friends, colleagues, etc. for the collection of assessments, associations and their duly elected board members are charged with the duty of doing just that. By volunteering to become a board member of your association, you are submitting yourself to be held to a high legal standard; the standard of being a fiduciary. Individuals who fill fiduciary capacities such as attorneys, accountants and association board members are charged with the highest, most stringent duties under the law.

A fiduciary must always put the interest of his or her constituency above his or her own interests and must always make decisions based upon what he or she believes is in the best interest of the community as a whole, not just a select few. Playing favorites is not an option. To that end, making decisions in a fiduciary capacity requires difficult and sometimes uncomfortable or unpopular decisions. One such decision charged to all board members in the State of Illinois is how and when to pursue a delinquent owner for past due assessments. The balance of the community, those owners who pay their assessments in a timely fashion, must have the trust and faith in their board members that the association is not asking them to carry the load for those who choose not to pay. Thankfully, in the State of Illinois, associations have an option for the collection of assessments that is superior to all others, and when used will reduce an association’s overall delinquency rate, the Forcible Entry and Detainer Act.

Forcible Entry and Detainer

Associations in Illinois may use the Forcible Entry and Detainer Act, or the “eviction statute” to collect delinquent assessments. Associations using the Forcible Act to collect assessments initiate collection by the service of a 30-day demand letter. The 30-day demand letter must be sent, by certified mail, to the owner at the unit, or to the owner’s off-site address, if an off-site address has been provided. The owner does not need to pick-up or sign for the 30-day demand letter. As long as the association is able to demonstrate that the demand letter was sent by certified mail to either the unit or the off-site address, no further notice is required and the owner has 30 days from the date of the letter to pay the delinquency. If the owner brings the account current within the 30 days, no further action can be taken. However, if the owner fails to pay any amount or if the owner makes a partial payment within 30 days, the Association is vested with the authority to file an eviction action against the owner in an attempt to collect all past due amounts.

If suit is filed under the Forcible Act the association will be asking a court to award it all past due assessments, attorney’s fees and court costs. Additionally, the association will be asking a court to award it possession of the owner’s unit, i.e. to evict the owner for non-payment. If an owner does not pay his or her share of the assessments and if the association is awarded possession of the unit, the owner will be afforded between 60 and 180 days, as fixed by the court, to pay the delinquency from the date of judgment (known as the “stay” period). After expiration of stay, if the owner has not cured the delinquency, the association is authorized to schedule an eviction with the county sheriff. If an eviction is completed, the owner loses the right to live in the unit, but not ownership of the unit. At this point the association can place a renter in the unit and apply all rental payments received toward the owner’s past due balance. In addition to the past due assessments, attorney’s fees, late fees and court costs, the costs incurred in making the unit rentable, such as repair costs and broker’s fees may also be recouped through rental payments. Keep in mind that leases with tenants are not unlimited in time and once the delinquency has been paid, the owner has the right to petition the court to regain possession the unit.

The Impact upon the Association

As you would expect, the number of completed evictions is relatively small in relation to the total number of cases filed to collect past due assessments. The possibility of losing the right to live in the owner’s home provides a great incentive for the delinquent owner to become current. If however, an owner does not pay and an eviction is completed, the impact upon an association as a whole can also be substantial, in a positive way. Once owners realize that the obligation to pay assessments is real and that the association’s rights to compel payment are substantial, the incentive to avoid the embarrassment of an eviction takes over. The end result of using the Forcible Act is often a reduction in an association’s overall delinquency rate and an association budget that on an annual basis sees no increase or a minimal increase in the owners’ assessment obligation.

Trauma Evictions Collections of Assessments and Other Sordid Tales

Assessment Collection for Community Associations

I. Obligation to collect assessments

While few take pleasure in pursuing their neighbors, friends, colleagues, etc. for the collection of assessments, associations and their duly elected board members are charged with the duty of doing just that. By volunteering to become a board member of your condominium, townhome, recreation and/or homeowner association, you are submitting yourself to be held to a high legal standard; the standard of being a fiduciary. Those individuals who fill fiduciary capacities, attorneys, accountants and yes, association board members, are charged with the highest, most stringent obligations under the law.

A fiduciary must always put the interest of his or her constituency above his or her own interests and must always make decisions based upon what he or she believes is in the best interest of the community as a whole, not just a select few. Playing favorites is not an option. To that end, fulfilling duties in a fiduciary capacity requires difficult and sometimes uncomfortable or unpopular decisions. One such decision charged to all board members of common interest communities in the State of Illinois is how and when to pursue a delinquent owner for past due assessments. The balance of the community, those owners who pay their assessments in a timely fashion, must have the trust and faith in their board members that the association is not asking them to carry the load for those who choose not to pay. Thankfully, in the State of Illinois, associations have several options for the collection of assessments. It is my opinion that one such option, the provisions of the Forcible Entry and Detainer Act, is superior to the alternatives.

II. Options for collection

A. Forcible Entry and Detainer

The Illinois General Assembly has bestowed a gift upon community associations in Illinois by making the Forcible Entry and Detainer Act, known on the street as the “eviction statute” automatically applicable to all condominium associations and to all townhome, homeowner and common interest communities that elect to use its provisions. Associations using the Forcible Act to collect assessments must initiate collection by the service of a 30-day demand letter. The 30-day demand letter must be sent to the owner at the unit, or to the owner’s off-site address, if such an address has been provided. The demand must be sent via certified mail. The delinquent owner has 30 days from the date of the letter within which to become current on the account. If the owner becomes current within the 30 days, no further action can be taken. However, if the owner fails to pay any amount or if the owner makes a partial payment within 30 days, the Association is vested with the authority to file suit against the owner in an attempt to collect all past due amounts.

If suit is filed under the Forcible Act the association will be asking a court to award it all past due assessments, attorney’s fees and court costs. Additionally, the association will be asking a court to award it possession of the owner’s unit. Yes, an owner can be evicted for failing to pay assessments. If an owner does not pay his or her share of the assessments and if the association is awarded possession of the unit, the owner will have not less than 60 additional days to bring the account current. After this 60 days has expired and if the owner has not paid the account in full, the association is authorized to schedule an eviction with the county sheriff. If an eviction is conducted, the owner loses his or her right to live in the unit, but he or she does not lose ownership of the unit. At this point the association can place a renter in the owner’s unit and apply all rental payments toward the owner’s past due balance. Leases with tenants are not unlimited in time and once the arrearage has been cured, the owner has the right to petition the court to seek to regain possession of his or her home.

As you would expect, evictions are relatively rare in relation to the total number of cases filed to collect past due assessments. The possibility of losing the right to live in the owner’s home provides a great incentive to pay the account in full. While entertaining the possibility of evicting one’s neighbor makes most people uncomfortable, in my opinion, this mechanism is the best tool to collect past due assessments and should be considered for use by all associations.

B. Assessment Lien Foreclosure

The obligation to pay assessments is not only the personal obligation of the unit owner, it is also an obligation that is a covenant burdening the property. As a covenant that binds the individual and the property, associations have liens for assessments upon each parcel in their respective community. Accordingly, while it is not recommended in light of the option of using the Forcible Act procedures described above, an association may foreclose its lien, just like a mortgage lender, in an effort to collect assessments. When compared to the Forcible Act, foreclosing a lien to collect assessments is a substantially more time consuming procedure. As opposed to the forcible proceedings, which are considered expedited proceedings (i.e. courts must handle and resolve them quickly), foreclosure proceedings could last anywhere between 9 months to 2 or 3 years before any resolution is obtained. Should the owner not pay the balance due, the ultimate outcome of a foreclosure action is that the association may end up owning the unit. Does the association want to own units? If so, will the association attempt to sell the unit? Will the association rent it out first and then try to sell it? Will the board be able to sell the unit without owner approval (it won’t if it’s a condominium)?

While the fear of losing ownership of one’s home can work to compel an owner to pay assessments, the process of foreclosing an association’s lien is not the most efficient manner to collect assessments and should only be used in limited situations such as delinquencies relating to vacant land.

C. Small Claims

If evicting an owner under the forcible statute or potentially taking ownership of a home through a foreclosure action makes boards and associations uncomfortable, another option available to collect assessments is to file an action in small claims court. The declaration creates contractual obligations on behalf of the owners and the failure to pay assessments is a breach of the declaration (contract) by the owner, which gives rise to a suit in small claims court. If an association elects to use this method to collect assessments, unlike proceedings filed under the Forcible Act, no 30-day demand letter is required to be sent prior to filing suit.

The real distinction between a small claims suit and a suit filed pursuant to the Forcible Act can be seen upon entry of a judgment. First, in a small claims suit, an association is not entitled to take possession or threaten an owner with taking possession of his or her home should the owner not pay. If a small claims judgment is obtained and if the owner does not voluntarily pay the judgment amount, the association will be required to pursue more traditional post-judgment collection remedies. Such post-judgment collection remedies include wage and bank garnishments, etc.

Unlike a forcible case, where no additional court appearances are required once judgment has been entered, post-judgment collection remedies associated with a small claims case require additional court appearances by the association’s attorney, which means more money is being spent by the association. Further, there is no guarantee that the association will be able to uncover any assets of the owner to be garnished in an effort to satisfy the past due balance (i.e. bank accounts, wages). Lastly, unlike an action filed pursuant to the Forcible Act, which requires the owner to pay not only the judgment amount, but also any additional assessments that have accrued since entry of judgment, a small claims judgment only obligates the owner to pay the amount of the judgment, plus statutory interest on the judgment at 9%. Therefore, the association that uses small claims suits to collect assessments may be put in the position of incurring attorney’s fees and court costs for the post-judgment work that is not collected, which means the association, should it desire to collect these amounts, will be required to start the process over again.

D. Liens

Recording a lien with the county recorder, which establishes that a past due balance exists for past due assessments, etc. is the most passive way for an association to attempt to collect a debt. Recording a lien carries with it no compelling forces such as a small claims money judgment or the possibility of being evicted from one’s home. Therefore, unless the recording of a lien is used in conjunction with one of the other collection methods outlined above, it is a relatively useless endeavor. Recording a lien for past due assessments will only compel an owner to pay in the event the owner either attempts to sell or refinance his or her home.

An Association must be aware that once it receives notice that one of its owners has filed for bankruptcy protection, and as long as the bankruptcy case is pending, no further attempts to collect any unpaid assessments may be commenced without first obtaining the approval of the bankruptcy court. This preclusion from collection during a bankruptcy case is commonly known as the automatic stay.

There are two types of bankruptcy cases that individuals may file. The first is a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, an individual is asking the court to “liquidate” all of his or her assets and discharge any remaining financial obligations as of the date the bankruptcy case is filed. An individual who is only seeking to “reorganize” his or her debts files a Chapter 13 bankruptcy. In a Chapter 7 bankruptcy, there is not much for an association to do to protect its interests. If the court determines that an individual in Chapter 7 bankruptcy is entitled to protection from his or her creditors, a discharge order will be entered. What is the effect of the discharge order on an individual owner’s assessment account with the association? All assessments that were due and owing as of the date the owner filed for bankruptcy protection may not be personally collected from the owner. However, the owner is obligated to make all payments for assessments that become due and owing after the bankruptcy filing date. For example, if an owner files for Chapter 7 bankruptcy protection on June 10th, all amounts owed through June 10th may not be personally collected from the owner if a discharge order is ultimately entered. However, all amounts that are levied on the account commencing on June 11th and forward may be collected from the owner, even if the owner obtains a bankruptcy discharge. BUT, these amounts may only be collected from the owner after the bankruptcy case is closed, unless the association has filed a motion for relief from the automatic stay with the bankruptcy court. If a relief stay motion is filed and granted, it allows the association to continue with collection of the post-petition assessments while the bankruptcy case remains pending.

Chapter 13 bankruptcies differ in that the individual filing bankruptcy is looking to reorganize his or her debts, not be completely absolved of them. In a Chapter 13 bankruptcy, an individual will set forth a proposed plan for repayment of his or her debts. Since an association’s right to receive assessment payments are secured by a lien against each individual owner’s home/property/unit, associations can receive 100% of the amounts owed to it at the time an individual owner files for Chapter 13 bankruptcy protection. There are, however, certain steps that an association must take in order to ensure that it is paid all of these amounts. Before these steps are described, associations must understand that regardless of whether an owner files for Chapter 7 or Chapter 13 bankruptcy protection, and if the owner obtains a discharge of his or her obligations, the discharge only eliminates the owner’s personal obligation to pay the delinquent assessments. Since the obligation to pay assessments is both the personal obligation of the owner and an obligation that runs with the underlying real estate, the association still has a valid lien for the unpaid assessments that were discharged in bankruptcy. The association may still collect the assessments discharged in bankruptcy, but it will need to be careful in doing so. Any association seeking to recover pre-petition assessments should consult with its attorneys to determine the appropriate method of collection.

As for the actions to be taken by associations in an owner’s bankruptcy case, the most common first step is the filing of a proof of claim. The proof of claim sets forth the amount owed to the association as of the bankruptcy filing date in addition to establishing that the association maintains a secured interest in the owner’s real estate. After filing the proof of claim, the association must make sure that the owner’s plan for repayment of his or her debts includes the association’s claim, in the full amount, and as a secured claim. If the association’s claim is not properly accounted for in the plan, the association may not receive all payments to which it is entitled and it should therefore consider filing an objection to the plan. Once the bankruptcy court confirms the owner’s plan, the association can expect to begin receiving monthly or periodic payments from the bankruptcy trustee toward the arrearage. The payments are typically spread out over a period of three to five years.

Review of Delinquent Assessment Accounts

Every association has them haunting their books: delinquent homeowner assessment accounts. Do any of the accounts belong to owners who lost their units in foreclosure but left an outstanding assessment balance? What should be done with the balance? Should the association try to collect it? Who is responsible for paying it? Should it just be written off? Or what about the current owner who is behind on her assessments but keeps saying she will pay it “next month?” This article seeks to provide guidance on how associations can determine answers to those questions. By obtaining a comprehensive review of its delinquencies, an association can put itself in a better position to collect those delinquent balances and to place itself on solid financial footing.

In addition to cluttering the monthly report from the management company, carrying delinquent account balances harms an association in several ways. First and foremost, every delinquent account represents budgeted assessments that, if not paid, must eventually be recovered by increasing the future assessments on the other, paying homeowners. An association’s board has a fiduciary duty to collect assessments. By not taking steps to address delinquencies, board members could fall short of their fiduciary obligations to the homeowners. Second, for condominium associations, FHA guidelines include a maximum delinquency threshold. If the number of delinquent account exceeds a certain percentage of the total accounts in the association, homeowners’ ability to qualify for FHA financing could be revoked. Third, when an association applies for a loan, one of the elements the bank considers is the delinquency rate. If an association has too many delinquent accounts, the loan’s underwriter may determine the risk in lending to the association is too great and deny the loan. Therefore, allowing delinquent accounts to fester affects the board’s ability to effectively manage the association and places a greater financial burden on the paying homeowners while also negatively impacting both the association and homeowners’ ability to obtain credit.

In order to help the board maintain as low of a delinquency rate as possible it is important to review the association’s delinquent accounts and develop answers to the questions posed at the beginning of this article. By making decisions on the association’s ability to collect delinquent accounts, the association’s financial standing should be greatly improved. There are essentially two primary legal proceedings that inhibit an association’s ability to collect a delinquent balance: mortgage foreclosure and bankruptcy. If a unit is foreclosed, the association’s lien is extinguished as of the date of the foreclosure sale; the new owner of the unit (typically the foreclosing bank) is not responsible for the prior balance, with certain limited exceptions (such as the 6 months of unpaid common expenses pursuant to Section 9(g)(4) of the Condominium Property Act.) The previous owner is still obligated for the charges that accrued prior to the foreclosure sale; however, the association’s ability to collect these charges is limited. The most common method to collect unpaid assessments is a forcible entry and detainer action, which allows the association to evict the owner of the unit if the assessments are not paid. However, this option is unavailable following a foreclosure sale because the party who owes the charges no longer owns/occupies the unit. Therefore, even if the association obtains a judgment against the defaulting owner, it must rely on post-judgment collection to collect the debt.

Post-judgment collection begins with a court proceeding known as a citation to discover assets. In a citation to discover assets, the debtor is required to appear in court to provide, under oath, financial information, such as the name of his/her employer, bank accounts, etc. If the debtor has assets or a job, the association can ask the court to turnover those assets or wages and apply these amounts to the association’s judgment. While post-judgment collection can be an effective tool, there are a few issues with this part of the collection process. First, the citation to discover assets summons must be personally served (not mailed) upon the debtor by a Sheriff’s deputy or private process server. If the association is unable to locate the debtor, the debtor cannot be served and the post-judgment collection process cannot begin. Second, even if the debtor appears and provides financial information to the association, the debtor has the ability to claim he/she lacks sufficient assets or income (called exemptions) so that the court could not order a turnover. Therefore, while under the proper circumstances post-judgment collection can result in payment for the association, it is not a certainty.

The second legal proceeding that affects an association’s ability to collect on delinquent accounts is bankruptcy. When a person files for bankruptcy protection, any personal liability she has for debts owed as of the date of the bankruptcy filing is legally removed (known as a “discharge”). Without personal liability, an association cannot use any of the post-judgment collection procedures described above. The bankruptcy does not extinguish the association’s lien for unpaid assessments. However, if the unit of a bankrupt owner is subsequently foreclosed, the foreclosure removes the lien. Therefore, if a bankrupt owner’s unit is foreclosed, the balance owed as of the date the bankruptcy was filed cannot be collected from any party. If, however, the bankrupt owner maintains ownership of the unit, any balance owed as of the date of the bankruptcy filing (the pre-petition amount) remains as a lien on the unit and can be collected at closing whenever the owner sells or refinances or through an in rem judgment against the property itself. The owner remains personally responsible for assessments that accrue beginning the month following the bankruptcy filing (the post-petition amount).

Cross checking the association’s delinquent accounts against foreclosure and bankruptcy records in order to determine the collectability of those accounts can be a daunting task for the board. Fortunately, our firm can help. We now offer a comprehensive review of an association’s entire delinquency report. Our office charges $600.00 for this service, which includes a review of all delinquent accounts against foreclosure and bankruptcy court records and a recommendation of options available to the association on each account. The board can then use this data and these recommendations to make informed decisions on how to proceed with each account. In some situations, an old balance previously viewed as uncollectable might be available through post-judgment collection. In other situations, a balance must be legally removed due to bankruptcy. Whatever the particular circumstance of each account, the review will give the board the tools it needs to fulfill its obligations to the association’s homeowners in order to reduce assessment delinquencies and promote the financial stability and creditworthiness of the community.