Association Collections and Bankruptcy – Info for Board Members

One of the biggest issues facing associations is the ability to collect from delinquent owners who have filed bankruptcy.   It is critical an association has an attorney experienced in creditor bankruptcy law in order to avoid waiving the right to collect those assessments from the delinquent owners, which often is thousands of dollars.  Below is some general guidance for associations:

  • Whenever the association receives notice an owner has filed bankruptcy, immediately send the notice to the association attorney, who should file a claim with the bankruptcy court on behalf of the association.  Make sure the claim is filed.  For some reason not all attorneys file these claims on behalf of associations.
  • The bankruptcy court issues an “automatic stay,” meaning the association cannot contact the owner to collect a debt.  Leave the collections to the association attorney.
  • Owners have a duty to pay assessments as they come due after filing.  If the owner does not pay, notify the association attorney, who can file a motion to lift the automatic stay.
  • Bankruptcy does not mean the past due assessments cannot be collected. It simply means the association cannot go after the owner personally by garnishing wages or other collection measures.  The association can still foreclose on the property “in rem,” meaning against the property only, not “in personam,” which is against the person.
  • Delinquent owners can strip the association lien in a Chapter 13 bankruptcy if the first mortgage exceeds the value of the property.  It is important for the association attorney to monitor the case and properly object to lien stripping.  There has to be a credible valuation of the property with a thorough survey. 
  • If the bankruptcy case is dismissed, the automatic stay is lifted, usually 15 days after the order is entered, and the association can pursue it assessments, interest, late fees, attorneys’ fees and costs as normal.

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