(October 2011)

So, your Association has a homeowner who is delinquent on his assessments. Before you are able to make any progress on collection and before a lien is recorded, you receive notice that he has filed for bankruptcy. What happens next?

The moment a debtor files for bankruptcy, an "automatic stay" is imposed. The automatic stay prevents creditors from taking any action to collect from a debtor. This is intended to give the debtor some breathing room and allow him to clearly evaluate his financial position without having to fend off creditors. Therefore, all collection efforts must cease until the automatic stay is either lifted or terminated.

The filing of a bankruptcy will only have an effect on the assessments incurred up to the date that the bankruptcy petition is filed. The debtor remains responsible for paying any debts arising after the bankruptcy petition is filed. Those debts are called "post-petition" debts. Therefore, after your delinquent homeowner files for bankruptcy, he is still required to pay assessments from the date his bankruptcy is filed forward. If he fails to pay those amounts, the Association can make a motion with the Bankruptcy Court for relief from the automatic stay, allowing the Association to proceed and collect on the post-petition assessments. Regardless, once the bankruptcy is discharged and the case is closed, the automatic stay will be terminated and Association will then be free to pursue the homeowner for his post-petition debts.

With the world's economy in turmoil and a significant increase in the unemployment rate, experts are forecasting a big increase in the number of bankruptcy filings in 2009. If your Association receives a Notice of Bankruptcy filing by one of its owners, don't panic as there are some remedies. But you must take quick action to protect the association's rights.

When the association receives a Notice of Bankruptcy, the association (or its legal counsel) should file a Proof of Claim to ensure that amounts due the association by the debtor (the delinquent homeowner who filed bankruptcy) are accounted for and the court and all of the parties involved in the bankruptcy proceedings are aware of the association's claim. We have been told by bankruptcy judges that notwithstanding what is stated in the Notice of Bankruptcy (where it will often state that there is no need to file a Proof of Claim) that all creditors (and the association is a creditor if it is owed assessment monies from the debtor/delinquent homeowner) should file a Proof of Claim as there is a possibility that the debtor/delinquent owner will convert their bankruptcy from one form to another where a Proof of Claim is required. It is a mistake for an association to believe that it can rely on the debtor to name the association as a creditor to whom money is due. If the debtor does not list the association as a creditor, and if the association fails to file a Proof of Claim, this could result in non-payment to the Association by the bankruptcy estate which could result in the termination of the Association's right to collect payments (delinquencies) from the delinquent homeowner once the bankruptcy is discharged. Think of the Proof of Claim as a notice to all parties of the association's right to payment.