Little noticed and hidden in the endless drumbeat of health and financial news of the past few months, there has been an unexpected drop in consumer bankruptcy filings. According to the American Bankruptcy Institute (ABI), there were 47% fewer personal bankruptcies in April 2020 compared to April 2019. Homeowners association lawyers are concerned, however, that this break in bankruptcy filings may not last.
The decline is likely affected by the measures put in place to aid those facing financial difficulties, including social distancing and other pandemic-related measures taken that have slowed down the court systems, temporary forbearances offered by many lenders and creditors, and actions taken by federal, state, and local governments to provide financial relief. Despite the decline, we believe the drop in filings is temporary, and we expect filings to increase in the future as these temporary measures expire.
While homeowners association lawyers hope that much of the financial pain is temporary, associations need to be prepared in the event that the financial pain is deeper and longer than hoped. Knowing the basics about the automatic stay, splitting the account, and the different chapters of personal bankruptcies will help the association plan for the future in case things don’t bounce back as quickly as hoped.
The federal Bankruptcy Code at 11 U.S.C. § 362 imposes a stay on all HOA collections activity when a debtor files bankruptcy. This means that all the debtor’s creditors, including homeowners and condominium associations, must cease all collections activity for the debtor. Collections activity includes, but is not limited to: sending past-due notices, filing liens, filing or continuing lawsuits or garnishments, and suspending the debtor’s rights to access amenities in the community.
Continuing these and other HOA collections-related activities after the owner files bankruptcy is considered a violation of the automatic stay. If the association violates the automatic stay, it can be subject to serious penalties, including severe monetary sanctions imposed by the bankruptcy court. See our previous blog about the importance of filing liens before bankruptcy.
Splitting the Account
When an owner files bankruptcy, the amounts owed to the association are split into pre- and post-petition amounts. All amounts owed by the owner as of the date the owner files the bankruptcy petition are considered pre-petition debt and will be administered by the bankruptcy court.
Amounts that come due after the date of filing are considered post-petition, and the owner will almost always be responsible for making these payments directly to the association in most Georgia bankrutpcy cases. It is important to remember that the automatic stay applies to activity relating to both pre- and post-petition amounts owed.
Chapter 7 Bankruptcy
A Chapter 7 is a liquidation bankruptcy. An owner can often discharge all pre-petition debt without having to pay any of the past due amounts to the association. Even though an owner can avoid paying any past-due amounts to the association, a Chapter 7 bankruptcy is not an “easy out” for delinquent homeowners.
There is a means test to qualify for Chapter 7, and the owner fails to meet the requirements, the case will be dismissed or converted to another chapter of bankruptcy. If the owner is found to meet the means test but have substantial equity in their home or other assets, the bankruptcy Trustee may sell assets to pay off some of the owner’s debts. Consult with your homeowners association lawyers as to the details of this process and when HOA collections may resume after the case is dismissed.
Chapter 13 Bankruptcy
A Chapter 13 is a reorganization bankruptcy. In most cases, an owner files a Chapter 13 in order to retain his or her home. In a Chapter 13 bankruptcy case, the association may be repaid the bankruptcy owner’s past-due assessments in full, so it is critical that the association take action, stay aware of court deadlines, and monitor the case for developments with the help of your homeowners association lawyers.
In most cases, the owner will present a plan to pay off secured debt and seek a discharge for unsecured debts. It is critical that homeowners and condominium associations file a secured proof of claim for the pre-petition debt owed to receive payment through the bankruptcy. Failure to do so could result in being cut out of the owner’s bankruptcy entirely and the association receiving nothing. After claims have all been filed and the plan is confirmed by the bankruptcy court, the owner will make payments to the Trustee, who then disburses payments to secured creditors throughout the life of the bankrutpcy case. The typical Chapter 13 bankruptcy lasts 5 years, and a lot can change in the owner’s financial situation during this time.
Dismissal and Discharge
All bankruptcies, whether they are Chapter 7 or Chapter 13, end in either a dismissal or a discharge. If the bankruptcy ends in a dismissal, then the association can proceed with HOA collections as if the bankruptcy had never been filed. If the owner successfully completes the bankruptcy and complies with all requirements, then the bankruptcy will end in a discharge of all personal liabilities for amounts owed. If the owner receives a discharge, creditors are barred from pursuing the owner personally for any amounts owed prior to the date of filing the bankruptcy petition.
Bankruptcy, whether it be a Chapter 7, Chapter 13, or even a Chapter 11, is complicated and has a lot of moving parts, especially when you are a secured creditor. The homeowners association lawyers at NowackHoward can help you navigate the minefield and ensure that the association takes all possible steps to preserve and protect its interests when faced with an owner filing for bankrutpcy.
Give us a call today at (770) 863-8900 or visit our online contact form to schedule a consultation with one of our attorneys, so you can stay abreast of the latest and best practices for HOA collections amid COVID-19.