SECURED OR UNSECURED, NO LONGER A QUESTION: ASSOCIATIONS MUST FILE PROOF OF CLAIM BY THE DEADLINE IN ORDER TO BE INCLUDED IN CHAPTER 13 BANKRUPTCY PLANS

A recent federal court decision highlights the importance of an association’s manager or board contacting the association’s attorney whenever a homeowner files for bankruptcy protection. When an individual files for chapter 13 bankruptcy protection, she is allowed to repay her debts over a period of up to five years through a court-approved payment plan, and her creditors are barred from attempting to collect on those debts unless first granted permission by the bankruptcy court. The plan is administered by the bankruptcy trustee, an official who collects money from the individual in bankruptcy (known as the “debtor”) and pays the creditors. In order to be included in the chapter 13 payment plan, a creditor, such as an association, must file a legal document with the bankruptcy court known as a “proof of claim.” The proof of claim sets forth the amount the debtor owed to the creditor as of the date she filed for bankruptcy protection (the “pre-petition debt”). Unless the debtor successfully objects to the proof of claim (i.e., convinces the court of some legal reason why the money is not owed or should not be paid through the bankruptcy), the creditor should be included in the plan and receive payments toward the pre-petition debt.

Because unpaid assessments are a lien on a homeowner’s unit in favor of the association, an assessment obligation is a “secured” debt (The lien on the unit “secures” the obligation.). The Federal Rules of Bankruptcy Procedure provide a deadline for when a proof of claim must be filed if a creditor wishes to be included in a chapter 13 plan. However, while it is well accepted that “unsecured” debts such as credit card debt will not be paid through the plan unless the creditor files a proof of claim by the deadline, there has been some confusion over whether this deadline applies to creditors, such as associations, holding secured claims.

The federal Seventh Circuit Court of Appeals, whose jurisdiction includes Illinois, settled this confusion in May 2015 with its decision in In re Pajian. For the first time, the Seventh Circuit clarified the proof of claim deadline established by the Rules of Bankruptcy Procedure applies to both unsecured and secured creditors. If a secured creditor does not file its proof of claim by the deadline, it may not be included in the chapter 13 plan and will not receive payments from the bankruptcy trustee.

The upshot of Pajian for associations is managers and board members, in order to ensure the association receives payments to which it is entitled, must notify the association’s attorney immediately upon receiving notice that a homeowner has filed for bankruptcy protection. The notice typically mailed to creditors by the bankruptcy court includes the proof of claim filing deadline. Given the ruling in Pajian, the proof of claim must be filed by this deadline in order for the association to receive payments through the plan. While a secured debt, even if not included in the plan, survives a discharge in a chapter 13 bankruptcy, collecting that debt five years down the road can be a much more cumbersome process when all that could have been required was filing a form with the bankruptcy court. Therefore, when the association’s manager or board becomes aware of a bankruptcy, notify the association’s attorney so she may, if necessary, file a proof of claim.

CONDOMINIUMS vs. COMMON INTEREST COMMUNITIES

A common source of confusion among property managers, association boards, and even attorneys is how to calculate the amount of charges that must be a paid by a third-party buyer (i.e., not the foreclosing bank) when a foreclosed property is sold, the so-called “six months.” Perhaps the greatest confusion is the fact the Illinois General Assembly established different rules for condominiums and common interest communities. A brief discussion of the similarities and differences between the two should provide some guidance for manager and boards and help to ensure the association receives the maximum amount to which it is legally entitled.

The six months rule for condominiums is established by Section 9(g)(4) of the Condominium Property Act. According to this Section, a third-party buyer is obligated to pay those common expenses that came due in the six month period preceding the institution of a collection action against the prior owner. Therefore, at a minimum, the subsequent purchaser must pay the unpaid charges attributable to the prior owner that came due during the six month period before the association started a collection action against the prior owner. Furthermore, Section 9(g)(5) also provides the foreclosure sale notice that is published in the newspaper must state any potential buyer, in addition to the six months, will be also be responsible for the legal fees required by Section 9(g)(1) of the Condominium Property Act. According to Section 9(g)(5) these fees must also be paid by a third-party buyer. Therefore, when calculating the total amount due from that buyer, a condominium association, in addition to the common expenses that came due in the six months preceding the initiation of a collection action against the prior owner, may also include in the total any legal fees incurred by the association in that collection action. Also, the six month limitation does not appear to apply to the legal fees; the full amount of legal fees, regardless of when they were incurred, may be added onto the six months of unpaid common expenses.

The six months rule for common interest communities is found in Section 18.5(g-1) of the Condominium Property Act. This provision is similar to the rule for condominiums in that a third-party buyer is also responsible for six months of common expenses that came due prior to the association starting collection against the prior owner. However, unlike Section 9(g)(5) which provides the buyer must pay all of the legal fees incurred in the collection case against the old owner, Section 18.5(g-1) limits this responsibility to court costs (e.g., court filing fees, process server fees, etc.). Therefore, a common interest community can recover the court costs but not the attorney’s fees it incurred in the previous collection action.

In summary, both condominium and common interest communities can recover six months of unpaid common expenses when a third-party purchases a foreclosed property. A condominium may also include the attorney’s fees and court costs it incurred in pursuing a collection action against the prior owner, while a common interest community may only include the court costs. In order for the six months rule to apply at all, both provisions of the statute require the association to initiate collection against the owner prior to the foreclosure sale taking place. While the association will incur legal fees in doing so, some (or in the case of condominiums, all) of those expenses can eventually be charged to the third-party that ultimately receives title to the property. Therefore, when the manager or board receives notice that a unit is in foreclosure and the owner is delinquent on assessments, the board should consider its rights under the applicable six months rule and how much of the delinquency it will be able to recover in the event it proceeds to initiate a collection action.

Collection of Pre-Bankruptcy Association Assessments . . . It Can be Done

When a homeowner in an association files for chapter 7 federal bankruptcy protection, bankruptcy law triggers certain rights and responsibilities for that homeowner and the association as they relate to that homeowner’s responsibility to stay current on his assessment account. One of the outcomes of a successful chapter 7 bankruptcy is the person who filed for bankruptcy (known as the “debtor”) receives a discharge, meaning he is no longer personally responsible for most debts he owed as of the date he originally filed for bankruptcy protection (“pre-petition debts”). Does this mean an association must write-off any assessments a homeowner owed when he filed for bankruptcy? Fortunately for associations, state and federal law allows an association a procedure to enforce the pre-petition assessment obligation following the conclusion of a chapter 7 bankruptcy.

While a homeowner who has completed a chapter 7 bankruptcy is no longer personally responsible for pre-petition assessments, the association still maintains its lien for unpaid assessments in the property because a bankruptcy discharge does not remove those lien rights. As such, even though the homeowner is no longer obligated for the assessments, the property itself still “owes” it. This idea is similar to a mortgage; if an owner does not make his mortgage payments, the bank has the option of forcing a sale of the home because the property itself owes the money in a legal sense. In Illinois, an association can enforce its lien by seeking an in rem judgment (a judgment against the property only, not against the homeowner) in a Forcible Entry and Detainer action, also known as an eviction. If the association obtains an in rem judgment for unpaid pre-petition assessments, the Illinois Forcible Entry and Detainer Act when combined with federal bankruptcy law allows the association to evict the occupants of a unit unless the entire assessment arrearage, including the pre-petition balance is paid.

Because an in rem judgment can be a powerful collection tool, an association should not immediately write-off an assessment balance when it receives a chapter 7 bankruptcy notice. That being said, the association must very carefully follow the steps to obtaining an in rem judgment for pre-petition assessments because any attempt to collect a pre-petition debt from the homeowner personally could be a violation of federal law and subject the association to severe penalties. Above all, the association should keep separate account statements for the pre-petition and post-petition (assessments that accrued after the homeowner filed for bankruptcy) balances and should send invoices for only the post-petition account to the homeowner. Therefore, if the board or property manager receives notice that a homeowner has filed for bankruptcy protection, please contact our office so we can help the association avoid violations of federal bankruptcy law while also ensuring the association can collect the maximum amount of assessments to which it is legally entitled.

A mechanic’s lien can be a powerful tool for contractors and provides an extraordinary legal remedy for those providing labor and/or materials. However, that power is not easily granted to contractors. Those seeking to derive the benefits of a mechanics lien are required to comply with the stringent procedures in place in order to perfect their lien.

A common mistake by contractors is not apportioning the contract amount, for work on common elements, among all of the owners in the association. The preeminent decision regarding the requirement to apportion the amounts among the entire ownership, based upon their percentage of ownership, is Argonne Construction Co. vs Norton, 29 B.R. 731 (N.D.Ill. 1983). In Argonne, the court held that the contractor was required to apportion the lien among the ownership if the declaration was recorded prior to the date of the contract.

Meaning that if your declaration is recorded, and your association hires a contractor to make improvements to the common element, that contractor cannot perfect the lien unless they have divided the contract amount due and owing among the ownership within the lien. This requires contractors to take the extra steps of not only finding the recorded declaration, but then also doing the math to divide the amount among every owner based upon the percentage of ownership.

The concept of a mechanic’s lien and the possibility of rights being foreclosed through a mechanics lien can be intimidating; however, there are safeguards in place to protect condominium associations. The mere fact that a lien has been recorded does not leave an association defenseless. It is essential to make sure that the contractor has perfected its lien by following the statutory requirements, properly tendering notice, and, under Argonne, apportioning the amounts among the ownership. Even if the lien has been properly recorded and perfected, the association still may have the defenses available under contract theory; and, if the work was not completed properly, the association may have a counter-claim for breach of contract.

If you are having an issue with a contractor or a lien has been recorded against the association, contact our office to discuss your legal defenses and options.

For those of you who live in a condominium, townhome or single family community association that was built during the last development boom, you may find that where you now live doesn’t look exactly as you expected it to when you first made your decision to buy. Vacant lots, unfinished units, foundations poured (but no home built), are all scenarios that many who live in a community association now find themselves. While none of the foregoing are an ideal living situation, at least we can all relax knowing that the builder/developer of the community, who no one liked anyway and went bankrupt or was foreclosed out of any property that it may have owned, will never come back, right? As Yogi Berra once said, “It ain’t over ‘til it’s over.” Some unfinished communities are now finding that rumors of a rebound in the residential real estate market are not exaggerated as new investors are purchasing vacant lots or unfinished units with the intention of completing construction. In some cases, the purchaser of the unfinished lots/units is a builder that is new to the community, in others the same builder who didn’t complete the project the first time around is back, just with a different name. In either case, communities must brace for the headaches and disturbances created by construction activity. Beyond the disruption to the peace and quiet, owners may notice the new (or old) builder engaging in activities that violate the association’s declaration. What rights does this new (or old) builder have? What rights do the owners and the association possess? Is this new builder going to run its operations with an iron fist like Mike Ditka or with kindness like Love Smith and what will this mean for the owners? The following provides a general description of the role of declarant, declarant rights, and the relationship between a party holding declarant’s rights and an association that has already been turned over to the owners.

Who or What is the Declarant?

The declarant is the owner of a property that becomes the condominium/common interest community. The declarant gives life to the condominium or common interest community by recording a declaration against the property that will ultimately comprise the association. The declarant is also the party that forms the not-for-profit corporation that will become the association. As the entity that most likely owns the entire tract of property upon which the association will ultimately be located, the declarant is vested with a great deal of authority to establish all of the covenants and restrictions under which the future owners will be expected to live. Along with the ability to establish total association governance, the declarant can create certain exceptions to the covenants, often favoring itself. These exceptions are referred to as declarant’s rights.

What Are Declarant’s Rights?

The reserved rights of the declarant are found within an association’s declaration. While not necessarily an exhaustive list of all possible declarant’s rights, the following are typical rights reserved by the declarant:

  1. Promotion: This allows the declarant to maintain model homes, a sales office within an existing building or unit, construct a temporary building for housing of a sales office and erect advertising or signage promoting the project and the sale of units;
  2. Construction: This allows the declarant to make alterations, additions or improvements to the property that it deems necessary or advisable for the project. This often includes landscaping and the storage of construction equipment and materials upon the property, without the payment of any fee;
  3. Easement and dedication: Easement rights allow the declarant to provide access to the property to any governmental authority, public or other utilities serving any lot or unit. Dedication rights allow the declarant to dedicate or transfer portions of an association’s common area to a county, municipality or other governmental authority that has jurisdiction over the property;
  4. Architectural control: This allows the declarant to formulate and bind all of the owners to certain standards governing the appearance of units/homes and the community as a whole;
  5. Amendment: In addition to possessing the authority to add property to the development, declarants typically have the unilateral ability to amend an association’s governing documents. In addition, any amendments the membership wishes to pass are also typically required to be approved by the declarant. If the declarant does not agree and its approval is needed, an amendment to the association’s governing documents will fail;
  6. Assessment payment exemption: Most declarations include an assessment payment exemption for the declarant. Often the obligation to pay assessments for a particular unit or lot does not commence until the declarant sells to a third party;
  7. Assignment: The right to assign allows the declarant to transfer to a third party all or some of the rights granted in the declaration. There will be a discussion of this right later in this article.

How Long Do Declarant’s Rights Exist?

Declarant’s rights cannot be asserted forever. However, they can survive turnover of the association to the owners. While there is no state law governing how long declarant’s rights may be asserted, most declarations provide that these rights may be exercised as long as the declarant holds or controls title to any portion of the development. For a condominium association, if the declarant still owns single unit, declarant’s rights remain. For a common interest community, if the declarant owns any lots upon which homes may be constructed or any portion of the common areas, declarant’s rights may be exercised.

When Can Declarant’s Rights Be Assigned and What Is the Impact of an Assignment?

Absent contrary language in an association’s declaration, declarant’s rights are freely assignable. This means declarant’s rights can be transferred between parties without association approval. The declarant can transfer its rights from one corporation to another related or unrelated corporation, to an individual or to its lender. The ability to assign declarant’s rights is often not tied to the original declarant maintaining an interest in the development. This means that even if the original declarant no longer owns any property in the development, if it is currently under bankruptcy protection, has completed bankruptcy, or has otherwise gone out of business, it may still assign its rights to a third party. An assignment of declarant’s rights allows the new builder to step into the shoes of the original builder and assert those same rights described above.

What Should an Association Do If the New Builder has Been Assigned Declarant’s Rights?

If an association finds that another builder is asserting declarant’s rights, the first thing it should do is ask to see the assignment. An assignment can only be accomplished through a written instrument. If the new builder cannot produce this document, it most likely does not have declarant’s rights and it should not be permitted to assert them. If a valid assignment is produced, the association must first understand that contacting its legal team in an attempt to mount a legal challenge to the new builder’s assertion of declarant’s rights would most likely be unsuccessful. Since a legal attack is not a good option, the board and owners should shift their collective focus to working with and establishing a relationship with the new builder. This can be difficult if the “new” builder is really the old builder, just with a different name, but the interests of the association and the new builder are not necessarily always at odds. Even if “Otis Wilson Builders” has returned to the scene as “Mamma’s Boy Construction,” the builder wants to provide attractive homes for sale, fast. The association wants its neighborhood completed and more homes paying assessments. While the new builder armed within assignment of rights can assert more control over the community than the owners would like, it will still have to work within the confines of the association’s declaration, not to mention any annexation or planned unit development agreements that may be on fi le with the municipality and which were created at the time of initial construction.

If an association finds that the builder is seeking to construct homes that look substantially different from what was previously constructed and the builder produces a valid assignment of declarant’s rights, unless the association’s declaration contains architectural controls regulating the exterior appearance of homes that are being ignored, a legal challenge is once again not the best response. Keep the lines of communication open with the builder and express the association’s concerns. A builder just wants to construct and sell homes. It does not want to be bogged down with association-related issues. To that end, open communication in an effort to tackle problems early in the process will benefit both parties.

If the builder is not as receptive to the association’s concerns, any changes in the appearance of homes that deviates from the annexation or planned unit development agreements must be approved by the appropriate municipal authorities (zoning board, plan commission, village board, etc.). It is during these municipal proceedings that any objections to the new builder’s plans should be voiced as they provide the association’s best chances of impacting what is ultimately constructed and the appearance of the community upon completion.

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.