Effect on Community Associations When Owners File Bankruptcy

Association assessment collection is every day business for Florida community associations. Often times, the unit owner will file bankruptcy to avoid this legal obligations. The law governing condominium and homeowners association assessments with regard to bankruptcy actions is found at 11 USC § 523 (a)(16). This law which generally states that assessments are not dischargeable. While this provision seems simple enough, there are exceptions and nuisances to collecting assessments when a homeowner files bankruptcy.

An individual homeowner has the option of a Chapter 7, Chapter 13, or Chapter 11 bankruptcy. Because of the complexity of a Chapter 11 bankruptcy, individuals typically utilize a Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is essentially a liquidation of assets and it benefits debtors who are unable to pay back all the creditors and/or debtors with few assets. Chapter 13 is a reorganization of the debtor’s finances and it benefits debtors who have some assets and slightly higher income, with the ability to pay back some creditors. Chapter 13 bankruptcies characteristically end in a repayment plan of creditors.

For a Chapter 7 bankruptcy, in order for the condominium or homeowners association to proceed with the collection of past-due assessments, the association must wait until the debtor is discharged from the bankruptcy action. The pre-petition debts are usually discharged but most post-petition debts may be collected by the association (depending on the language of the bankruptcy order). The post-petition debts are collectible even if the homeowner walks away from his/her condominium unit in the bankruptcy action.

For a Chapter 13 bankruptcy, it is slightly more complicated for associations to collect the past-due assessments as associations may have to wait until the end of the payment plan to pursue collections. The exception to general rule of 11 USC § 523 (a)(16) for the dischargeable debts of a Chapter 13 bankruptcy is 11 USC § 1328 (a), which provides a “super discharge” that may discharge post-petition debts up until the time of the end of the payment plan.

Furthermore, for Chapter 13 bankruptcies, the pre-petition debts as well as post-petition debts may be dischargeable. The post-petition debts that are discharged do not discharge post-petition debts forever, as this would allow individuals to live in association communities for the rest of his/her life without paying assessments. The post-petition debts that are discharged are commonly discharged from the date of the petition to the date of the completion of the plan. If provided for by the bankruptcy court, the association assessments may be provided for in the repayment plan.

Associations that don’t want to wait until the end of a lengthy repayment plan are not without a remedy. While the association may have to wait up to five years for the end of the repayment plan to pursue a money judgment, the association has an alternate remedy of pursing an in rem action against the unit. The ability to pursue an in rem action may be muddied if there are superior lien holders, like the mortgage holder.