Repeated bankruptcy filer/homeowner

Started by ChrisM33 • 13 replies • 474 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

ChrisM33 (Florida)
Posts: 8

Posted:

We have a household that continously files bankruptcy, alternating between Chapters 7 and 13 to get around the system. They owe thousands in HOA dues. Attorney already said during pre-petition, we are unable to try to collect past dues, and can only send a collection notice when they are 2 months behind after they filed. How do you collect on a household if they file bankruptcy repeatedly? Have any of you had this problem with a household?

KellyM3 (North Carolina)
Posts: 2,239

Posted:

You won't collect those dues unless you're ever able to foreclose the property in hopes the threat of house loss will spur payment. Bankruptcies that clear liens will clear your HOA liens.

That said, you'll need to create "Bad Debt" expense in your operations budget and fund it at the amount equivalent to this property's annual dues. In this manner, your budget stays true as you seek solutions.

That homeowner has ruined their financial health repeatedly. That must be quite rare.

CathyA3 (Ohio)
Posts: 6,299

Posted:

We have one of those in my community. They play the game well: paying just enough often enough so that if we tried to foreclose a judge would likely view those dribs and drabs of money as "an attempt to pay" and not allow the foreclosure.

You do what you can. File a lien and consider small claims court. But anyone who has trashed their credit worthiness so thoroughly is unlikely to care about anything an HOA can legally do.

(There are limits and disqualifications for bankruptcy filings, though, that are designed to make situations less likely. You may want to come up with a game plan for the various possibilities and the minute the pieces all align, jump on it. But you need to have an appetite for cat and mouse games, and most board members have enough other things on their minds.)

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By ChrisM33 on 08/10/2021 5:47 AM
How do you collect on a household if they file bankruptcy repeatedly? Have any of you had this problem with a household?

I am not convinced your HOA obtained a complete answer from its attorney. Is this attorney specialized in collections? If not, get an attorney who is.

Else I would be keeping in mind CathyA3's comments. She's in Ohio. Her advice here is solid.

CarissaM
Posts: 119

Posted:

Quote:

Posted By ChrisM33 on 08/10/2021 5:47 AM
We have a household that continously files bankruptcy, alternating between Chapters 7 and 13 to get around the system. They owe thousands in HOA dues. Attorney already said during pre-petition, we are unable to try to collect past dues, and can only send a collection notice when they are 2 months behind after they filed. How do you collect on a household if they file bankruptcy repeatedly? Have any of you had this problem with a household?

First I'm surprised, liens survive bankruptcy unless you relinquish the property. Also, there's a time limit between filings of 2 years for Ch.13 and 8 years for Ch.7. The court will only accept so much so even if they've skirted it in Ch. 7 and then Ch. 13...and then managed to get another Chapter 7 somehow, their time will run out.

As an HOA your best bet is be proactive in your attempts to collect, follow the established procedure for collecting, and lien immediately when available. If your state allows I'd push for the foreclosure filing. Nothing says pay up like an HOA threatening to take your house.

We had to file to foreclose on a homeowner to get them to pay and finally got paid. The FIRST quarter after they settled up guess where we are....back to the attorney to start the lien process again. They're already 45+ days past due and so we have to pay our attorney to begin the same process again. This cost rolls down to the homeowners in dues. This is so frustrating. So far we haven't been up against the bankruptcy, but I'm just waiting.

CarissaM
Posts: 119

Posted:

Liens "USUALLY" survive, I should have added. I'm sure there are ways around that.

DaveP8 (Oklahoma)
Posts: 47

Posted:

We have one of those. Multiple liens on the property, not just the HOA. Hasn't paid dues in over 10 years. Homeowner filed bankruptcy to avoid sheriff auction, then defaulted on bankruptcy agreement. We are waiting for bank to foreclose on the property but he may be paying enough to avoid that. Seems to know how to beat the system.

DouglasK1 (Florida)
Posts: 2,046

Posted:

We had one that serially filed bankruptcy, mainly to forestall foreclosure by the mortgage holder. Around the 4th round the judge dismissed the bankruptcy case, basically saying that the bankruptcy law was not meant to be used to perpetually stall foreclosure.

Assuming there is a hearing/trial/etc. that will allow the association to have input, you could try to make that case and see if the judge is responsive to it.

Escaped former treasurer and director of a self managed association.

SheliaH (Indiana)
Posts: 6,964

Posted:

Good heavens, I read this and thought for a moment one of the residents in my community moved to yours! Your resident and ours must be relatives - she was a problem when I moved into the community 20 years ago. I've written about her before on this website - she'd fall behind, we'd send her to the attorney (who'd add the current delinquency to the ones he was still working with), we'd go through the lien process and get close enough schedule a sheriff's sale when - she'd declare bankruptcy. As you've found out, declaring bankruptcy stops everything because the court decides what happens next. In our case, a payment plan would be set up, she'd ignore it, the case would be thrown out and we'd start over. Part of the reason we switched association attorneys was that we thought he wasn't being hard enough. He was and still is a nice man, but we felt there had to be another response besides "well, she knows how to play the system."

The bankruptcy code was updated about 10 years ago to try and stop this nonsense, but apparently, it hasn't gone far enough. You'll have to go to your attorney for the details, but I believe one of the things it did was to put people in chapter 13 automatically so they could try and pay down the debt. I also recall that if you file two or three times within 3-5 years and still don't get things straightened out (or ignore the judge's orders), you're prohibited from filing bankruptcy again for a few years.

You didn't say which bankruptcy the person has filed this time, but I assume you've filed a proof of claim (again) with the court. I would also suggest this time you go to the next hearing and give the court the history of this owner's behavior and how much time and money he/she/they have cost the association.

If you've sent any letters to the mortgage company (assuming they have one), I'd blast them in court as well. Buried somewhere in most mortgage papers is language stating the homeowner isn't supposed to do anything to cause someone to file liens against the house (e.g. not paying property taxes.)

Years ago, someone on this website suggested notifying the mortgage company as soon as they fell behind - in some cases (unfortunately, not enough) the mortgage company would pay the delinquency and add it to the person's balance or start their own foreclosure. The banks only care about getting paid and so they may force a sale on the property. Unfortunately, this is when the HOA often gets screwed - the sales price is usually only enough to pay off whatever the bank will settle for and there's nothing left to give to the HOA. That happened to us more times than I care to remember.

It was also suggested years ago on this website that the HOA file a 1099 with the IRS for the delinquent amount. The downside is once that's done, the HOA can't do anything else to try and collect the money. On the other hand, the IRS would consider this income and so the homeowner might have to pay taxes on it. The IRS is a group I personally don't want to play games with. Before you go this route, be sure to talk to your attorney about the pros and cons. I would consider it the nuclear option after I've tried everything else, because the board will have to vote to write off that amount.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By SheliaH on 08/10/2021 11:06 AM
Good heavens, I read this and thought for a moment one of the residents in my community moved to yours! Your resident and ours must be relatives - she was a problem when I moved into the community 20 years ago. I've written about her before on this website - she'd fall behind, we'd send her to the attorney (who'd add the current delinquency to the ones he was still working with), we'd go through the lien process and get close enough schedule a sheriff's sale when - she'd declare bankruptcy. As you've found out, declaring bankruptcy stops everything because the court decides what happens next. In our case, a payment plan would be set up, she'd ignore it, the case would be thrown out and we'd start over. Part of the reason we switched association attorneys was that we thought he wasn't being hard enough. He was and still is a nice man, but we felt there had to be another response besides "well, she knows how to play the system."

The bankruptcy code was updated about 10 years ago to try and stop this nonsense, but apparently, it hasn't gone far enough. You'll have to go to your attorney for the details, but I believe one of the things it did was to put people in chapter 13 automatically so they could try and pay down the debt. I also recall that if you file two or three times within 3-5 years and still don't get things straightened out (or ignore the judge's orders), you're prohibited from filing bankruptcy again for a few years.

You didn't say which bankruptcy the person has filed this time, but I assume you've filed a proof of claim (again) with the court. I would also suggest this time you go to the next hearing and give the court the history of this owner's behavior and how much time and money he/she/they have cost the association.

If you've sent any letters to the mortgage company (assuming they have one), I'd blast them in court as well. Buried somewhere in most mortgage papers is language stating the homeowner isn't supposed to do anything to cause someone to file liens against the house (e.g. not paying property taxes.)

Years ago, someone on this website suggested notifying the mortgage company as soon as they fell behind - in some cases (unfortunately, not enough) the mortgage company would pay the delinquency and add it to the person's balance or start their own foreclosure. The banks only care about getting paid and so they may force a sale on the property. Unfortunately, this is when the HOA often gets screwed - the sales price is usually only enough to pay off whatever the bank will settle for and there's nothing left to give to the HOA. That happened to us more times than I care to remember.

It was also suggested years ago on this website that the HOA file a 1099 with the IRS for the delinquent amount. The downside is once that's done, the HOA can't do anything else to try and collect the money. On the other hand, the IRS would consider this income and so the homeowner might have to pay taxes on it. The IRS is a group I personally don't want to play games with. Before you go this route, be sure to talk to your attorney about the pros and cons. I would consider it the nuclear option after I've tried everything else, because the board will have to vote to write off that amount.

Actually, if you live in a HOA and have a mortgage, you would have signed a PUD or Condo Rider.

Curious, if you file a 1099 with the IRS, what tax id would you be using for the homeowner?

DaveP8 (Oklahoma)
Posts: 47

Posted:

Our "problem" homeowner also has an IRS lien on the property.

SheliaH (Indiana)
Posts: 6,964

Posted:

Quote:

Actually, if you live in an HOA and have a mortgage, you would have signed a PUD or Condo Rider.

Curious, if you file a 1099 with the IRS, what tax id would you be using for the homeowner?

Therein lies the rub - I recall asking that question at the time we discussed it and was told you'd use the homeowner's SSN. The question, of course, is whether you have it. When our attorney negotiated payment plans, he'd request income information and I don't know if that also included the SSN so the information could be verified, but I think that's how it would have worked.

Since he was in a collections role for us, there are safeguards we expected him to follow to prevent identity theft and unauthorized disclosure of financial information - it wasn't a problem for us because this attorney's family once ran a collection agency and so he knew what could and couldn't be done. That said, we didn't take that option because, as you note, it could create another set of problems. In fact, here's an article on how people might step around the 1099-C - https://www.bankruptcysoapbox.com/form/

I also remember being told that even if there was a bankruptcy, the HOA debt was considered personal and could follow the homeowner - can't remember how (it's been several minutes since I've discussed this stuff). That's why it's so important for the OP to discuss all options with the association attorney or a really good debt collection attorney who's familiar with HOA delinquency. More often than not, the HOA gets nothing and has to write off the debt, especially when you see it's costing more to pursue the collection than what you may actually get.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

SheliaH (Indiana)
Posts: 6,964

Posted:

Just noticed Dave's statement that the homeowner has an IRS lien on the property. That alone might result in any further efforts by the HOA to go to pot because we all know the IRS always gets its money in the end - and they'll even trump the bank. Of course, it may also mean the homeowner will have no choice, but to sell - sometimes, the only thing you can live with is the knowledge that the deadbeat is finally out of your hair and hopefully the house will be purchased by someone more responsible.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

NpS (Pennsylvania)
Posts: 4,216

Posted:

Roughly 20 states allow superlien priority to HOAs. It's important, if your state allows it, to know how superliens work.

I'll use my state as an example. PA has a 6 month superlien priority period. Other states have 9 months or more, but it works the same.

Let's say that HOA fees are $100 per month, and the debtor owes $3,000 to a PA HOA. The Bankruptcy court will divide the $3,000 debt into two parts. $600 for the 6 months just prior to the bankruptcy filing, and $2,400 for everything else.

When it comes time to distribute the foreclosure proceeds, the superlien amount will get paid after foreclosure expenses and government debts, but before the mortgage holder. The "everything else" claim will be in line after the mortgage holder, and maybe some other debts as well. In many cases, there's nothing left for the HOA after the mortgage holder has added tons of costs that can be legally tacked onto the debt.

What does this mean?

For one thing, you have a chance of recovering 100% of your legal fees and other costs if they occur during the superlien period. But if you incurred legal fees say 7 months before the bankruptcy filing, you're probably SOL and will have to eat your legal fees.

Right now, we have an owner who filed for bankruptcy once, and enough years have passed so that he can file again. Surprise, surprise - He's very delinquent.

What are we doing?

We are fining him through the roof. Every legitimate violation we can tack on. Not difficult to find maintenance violations on a house that doesn't pay fees, and we're not letting anything go.

But that's not all. Under our docs and state law, we can tack on late fees and interest on everything. So that's what we do - because no one is going to challenge legitimate fees charged during the superlien period. So we go from maybe $600 to $1200 recoverable (not including legal fees). Instead of eating $2400, we will only eat $1800 instead.

Summary - Know if your state allows superlien priority, and do what you can to maximize what goes into that period. Good idea to talk with a bankruptcy lawyer. It's a highly specialized area.

One more thing of note -

The bankruptcy filer has to file schedules of all debts that he wants relief from. If he doesn't include all the debts you have against his house on those schedules, he doesn't get relief from the bankrutcy court. Many mistakes are made by debtors and their lawyers. A good bankruptcy lawyer will catch those mistakes.

Sikubali jukumu. Read all posts at your own risk.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here