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CONDOMINIUM UNITS IN FORECLOSURE DURING A RISING REAL ESTATE MARKET

In 2017, Illinois had the fourth highest rate of foreclosure filings in the United States. While the overall number of foreclosures being filed is decreasing, foreclosures continue to present issues for condominium associations throughout the state.

Generally speaking, a mortgage foreclosure of a condominium unit is a straight forward process.  When a condominium unit owner fails to pay his or her mortgage, the bank files a lawsuit asking that the condominium unit be sold at public auction and that the funds from the sale be applied to the unpaid mortgage.  Over the past decade, it has been a near certainty that a condominium unit sold at foreclosure auction would fetch a price less than what was owed to the bank.  While the condominium association was named as a defendant in the foreclosure action, there was typically no need for it to expend time and money participating, as there was no money left over from the foreclosure sale to go towards unpaid common expenses.

Now, however, this is not always the case for condominium associations.  Rising home values have resulted in an increasing number of condominium units being sold at foreclosure auction for an amount greater than what the bank is owed.  This results in a “surplus,” which is to be used to pay other lien holders, including condominium associations, which have a lien for unpaid common expenses pursuant to Section 9(g)(1) of the Illinois Condominium Property Act and their respective Declaration.

Unfortunately, it’s not always as easy as just asking a court to turn over the surplus funds to the Association.  Assuming the condominium association was named as a defendant in the lawsuit (as Section 9(g)(1) of the Illinois Condominium Property Act requires), by the time the association realizes a surplus exists it is likely the association has been held in default for failing to take action once served with the foreclosure suit.  Some judges have found that a condominium association that has been held in default is not entitled to recover unpaid common expenses from the surplus funds.  Even more frustrating, it is possible these surplus funds will be turned over to the former owner of the condominium unit, despite the fact that this owner failed to pay their proportionate share of the common expenses during their period of ownership!

Beyond preserving its right to collect any surplus funds, there is another reason for a condominium association to strongly consider participating in the foreclosure of a unit.  Section 9(g)(4) of the Illinois Condominium Property Act provides that the purchaser of a condominium unit at a foreclosure sale (or, in the event the unit is purchased by the foreclosing bank, the subsequent purchaser) must pay any unpaid common expenses for the unit which became due during the 6 months “immediately preceding institution of an action to enforce the collection of assessments.”  In short, while the foreclosure of a condominium unit extinguishes the association’s lien for unpaid common expenses, the association is still able to collect 6 months of unpaid common expenses provided it instituted an action to collect them.  One option a condominium association has is to institute their collection action by filing a counter-claim against the owner in the foreclosure case itself.  While instituting a collection action may seem onerous, the Illinois Condominium Property Act also affords a condominium association the right to collect the attorney’s fees and costs form this future owner, along with the 6 months of unpaid common expenses.

To summarize, increasing home values are causing a dramatic increase in frequency and amount of surplus funds being available after foreclosure sales.  In the event a condominium association fails to appear and file a responsive pleading in the foreclosure, it could be precluded from collecting unpaid common expenses from the surplus finds.  Further, and regardless of whether the foreclosure sale results in a surplus, a condominium association is able to collect 6 months of assessments, attorney’s fees, and costs from a future owner, provided that it has instituted an action to collect these unpaid common expenses.  This means that, except in limited circumstances, a condominium association should strongly consider filing an appearance and responsive pleading when served with a foreclosure, as doing so will entitle it to recover unpaid common expenses in the event of a surplus, obtain 6 months of assessments, attorneys, fees, and costs from a future owner of the unit, or both.

IT’S NEVER A BAD TIME TO REVIEW YOUR DELINQUENCIES

With the budgeting and annual meeting season in the rear-view mirror and with the opening of pool season still a couple of months away, now is the time to review your association’s assessment delinquencies.  There’s never a bad time to review delinquencies, but this is a particularly good time to determine if the owners are all carrying their fair share of the common expense.  I have never understood the thought that any percentage of owners who don’t pay as being acceptable or expected.  Setting an acceptable percentage of 10 or 10% of owners who are delinquent is really an arbitrary action.  Why should 20% of the owners be allowed to not pay their fair share?  The perfect storm of a mortgage foreclosure action coupled with a bankruptcy discharge could ultimately render an owner’s debt uncollectable, but absent the confluence of these events, very few delinquencies are uncollectable.

Recent Illinois Supreme Court decisions in Spanish Court Two and 1010 Lake Shore have recognized and respected condominium association lien rights.  Associations need to take advantage of the myriad of tools available to collect delinquent assessments.  Actions for possession under the Forcible Entry and Detainer Act, lien foreclosure and small claims actions all provide great opportunity to make associations whole.  While the landscape of community association governance has changed substantially over the past few years, one truth remains:  Diligent and aggressive assessment collection is a necessity.  Collection of assessments is the foundation of a board’s fiduciary obligation.  Associations cannot function properly when not fully funded.  In the competitive residential real estate market in which we now find ourselves, buyers are becoming more discriminating.  The financial health of a community is a much more substantial factor in determining whether a particular unit is desirable for purchase.  If a prospective owner has the choice between purchasing a unit in a well-funded community as opposed to one with substantial delinquencies and a looming large special assessment, what decision will this individual likely make?

Boards and management should not struggle with assessment collection.  A comprehensive assessment collection policy that affords the association’s counsel the opportunity to move files diligently without the need to constantly consult with the client will result in a greater success rate on delinquent files.  Regular reviews of an association’s delinquencies is also a must.  Boards and management should be reviewing their delinquencies minimally on a quarterly basis.  Our office also welcomes the opportunity to assist boards and management in reviewing delinquencies and making recommendations as to which accounts should be pursued and whether any debts should be written-off as uncollectable.  The jobs of board members and managers are complicated enough without having to be deeply engaged in the assessment collection process.  Utilize your professionals and allow your attorneys to take this important element of managing an association off your plate.  Don’t ignore your delinquencies.  The law provides great opportunity to minimize and eliminate them.

 

This article is being provided for informational purposes only.  This article does not constitute legal advice on the part of Keay & Costello, P.C. or any of its attorneys.  No association, board member or any other individual or entity should rely on this article as a basis for any action or actions.  If you would like legal advice regarding any of the topics discussed in this article and/or recommended procedures for your association going forward, please contact our office.

On December 3rd, the Illinois Supreme Court issued an opinion confirming the holding of the First District Appellate Court in the case of 1010 Lake Shore Association vs. Deutsche Bank National Trust Company. If you are reading this article, you probably know the facts of this case already. If not, in a nutshell, the case involved a foreclosed unit at 1010 Lake Shore that Deutsche Bank purchased at a foreclosure auction. The foreclosed-out owner owed a substantial balance to the Association at the time the foreclosure sale took place. Upon taking ownership of the unit, Deutsche Bank failed to pay any assessments. The Association ultimately sued Deutsche Bank in circuit court and the court entered judgment against Deutsche Bank for the pre-foreclosure balance. Deutsche Bank appealed the circuit court’s ruling and on appeal the First District Appellate Court held and the Illinois Supreme Court subsequently confirmed that under Section 9(g)(3) of the Illinois Condominium Property Act, a foreclosure purchaser must pay common expenses beginning the month after the sale. The Appellate Court and Supreme Court also held that if a foreclosure purchaser fails to pay assessments beginning the month after the foreclosure sale, the association’s lien for common expenses not paid by the foreclosed-out owner is not extinguished and the foreclosure purchaser then becomes obligated to pay the entire pre-foreclosure balance.

What does this mean for condominium associations and how should associations and management handle unpaid balances on foreclosed units?

  • Actively monitoring foreclosures continues to be important. Those associations that work with our office know how frequently we track foreclosure cases for our clients. We have consistently advised our clients the importance of knowing the status of pending foreclosure actions. The holding in this case makes knowing whether a unit has recently been sold at foreclosure auction more critical than ever as not being on top of the status of a sold unit could result in an association losing out on its right to collect pre-foreclosure amounts.
  • Don’t write off balances. Writing off a pre-foreclosure balance without consulting with counsel could result in an association walking away from money it is legally entitled to recover.
  • If the purchaser of a unit at foreclosure (a lending institution, a quasi-governmental agency, or a third-party investor) fails to timely pay the assessment due the month after the foreclosure sale is conducted, turn the account over to association counsel for collection. Do not wait 60, 90 or 120 days after confirmation of the foreclosure sale to turn the account over if there is a pre-foreclosure balance and the new owner has not paid any post-foreclosure assessments.
  • Once an account has been turned over to counsel for collection, do not accept any payments without first discussing the matter with counsel. Accepting a payment will most likely preclude an association from collecting any portion of the pre-foreclosure balance.
  • It does not matter if an association has been included as a defendant in a foreclosure action. The obligation to promptly pay post-foreclosure assessments applies to all foreclosure actions, whether the association has been named as a defendant or not. Further, the Supreme Court also appeared to state that if an association is not named as a defendant in the foreclosure action, the association’s lien is not extinguished even if post-foreclosure assessments are paid.

Because Deutsche Bank did not pay any post-foreclosure assessments, the Supreme Court did not address the timing of when a foreclosure purchasers’ ability to extinguish the pre-foreclosure lien by paying the post-foreclosure assessments expires. The only statement the Supreme Court made on the issue is Section 9(g)(3) “provides an incentive for prompt payment,” but it did not include any definition of what “prompt” means. Therefore, the Court did not impose any set deadline for payment. Accepting a payment, regardless of when the payment is made, most likely eliminates an association’s ability to collect the pre-foreclosure balance. Without any additional guidance from the Court, the best recommendation we can make is to be aggressive in turning accounts over post-foreclosure if the accounts have a pre-foreclosure balance and once accounts are turned over for collection, do not accept any payments.

While the General Assembly has not been responsive to efforts made by those who advocate on behalf of condominium associations to afford some additional relief related to the loss of assessment revenue that usually accompanies a foreclosure, the Illinois Supreme Court has unanimously recognized the obligation of foreclosure purchasers to promptly make payments upon taking ownership of units. If a foreclosure purchaser fails to promptly make post-foreclosure assessment payments and if an association acts diligently, it will put itself in position to recover pre-foreclosure amounts it may have believed were lost once ownership of the unit transferred.

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.

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.

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.