Delinquencies out of control? K&C can help.
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.