There is no denying this year has been one for the history books and it is not over yet. As we continue to see hard economic times, property owners associations (POA) and their managers could be faced with one or multiple bankruptcy filings from homeowners with past due assessments this year and for years to come. The purpose of this article is to introduce you to the bankruptcy basics and help the POA, or the manager navigate this trying subject.
1. The Automatic Stay
One of the first items that needs to be discussed is the automatic stay. The automatic stay is an automatic injunction that halts actions by creditors, with certain exceptions, to collect debts from a debtor who has declared bankruptcy. 11 U.S.C. Section 362 of the Federal Bankruptcy Code prevents POAs from attempting to collect any property of the estate from the debtor.
It is important to note that violating the automatic stay can be incredibly costly and can have serious repercussions. A violation is any attempt to collect a pre-petition debt from the bankruptcy debtor. This can include phone calls, emails, or letters. All it takes is one demand for payment and the bankruptcy debtor can file a lawsuit against the POA. The number one culprit when it comes to a violation are automatically generated statements and Chapter 209 letters. So, what happens when the automatic stay is violated? Well, the individual is entitled to recover actual damages, including costs and attorneys’ fees. It is important to always report notice of bankruptcy filing to counsel as soon as possible as this will help eliminate any possibility of a violation.
2. Proof of Claims (POC)
Once the bankruptcy has been filed by the debtor and the automatic stay is put into effect, it is imperative that a Proof of Claim (POC) be filed. A POC mainly relates to pre-petition debt and contains information about the nature of the debt and the amount of the debt. The creditor must file the POC to get paid during a debtor’s bankruptcy proceeding and it must be properly prepared. A bankruptcy judge will strike improperly filed POCs. The POC is filed to claim pre-petition amounts and, in some instances, post-petition amounts. The pre-petition amount is due and owing prior to the date the bankruptcy petition is filed and post-petition amounts are due and owing after the date the bankruptcy petition is filed.
3. Most Common Bankruptcy Actions
The most common bankruptcy actions when it comes to POAs are: Chapter 7 and Chapter 13. Chapter 7 is the liquidation of most, if not all, of the Debtor’s assets to satisfy the Debtor’s liabilities. Chapter 13 is the reorganization/adjustment of the debts of an individual debtor with annual income. If the debtor ultimately files for Chapter 7, they will be met with stricter standards than a Chapter 13 bankruptcy. When filing for bankruptcy protection, the goal is to have the debts discharged. Meaning, the court grants the cancellation of the obligation to repay the debt to the creditors. But the court could issue a dismissal making it as if the bankruptcy never happened. Below are the different ways a discharge and a dismissal differ from Chapter 7 and Chapter 13.
Effect of Discharge
- Discharge owners’ personal liability
- Does not discharge POA’s lien
- Discharges owners’ personal liability
- Discharge POA’s lien
Effect of Dismissal
- Treat owner the same as before bankruptcy filing
- All sums become due
- Treat owner the same as before the bankruptcy filing
- All sums become due
4. Lien Stripping
In the context of a POA, lien stripping can occur when the fair market value of the house is less than the first lien or mortgage amount plus tax amount on the house. A lien strip is ONLY available in Chapter 13 bankruptcy. In order for a POA (or other subordinate lien) to be actually stripped:
1) the Chapter 13 Plan must be completed;
2) the debtor must receive a Chapter 13 discharge, and
3) there must be a confirmed lien strip.
As more than one million people per week continue to file for unemployment, the economic outlook for most Americans remains uncertain. Going in to 2021 as assessments come due, we may see many homeowners filing for bankruptcy. It is important that POAs understand the basics of bankruptcy proceedings to avoid potential costly litigation proceedings in the years ahead.
To learn more on the bankruptcy process, join Equity Shareholder Clint Brown, on Wednesday, September 23, for a webinar providing further detail on the basics of bankruptcy. This webinar is approved by the Community Association Managers International Certification Board (CAMICB) to fulfill 1 hour of continuing education requirements for the CMCA certification. www.camicb.org