HOA bankruptcy

Bankruptcy is a complex process, not amenable to easy answers. Most likely, the homeowners association, whether it is incorporated or not at this point, would be listed as a creditor.

It is also possible that if the builder did not pay the bills, using the association funds for other expenses, there is fraud involved.

If the unpaid association bills are not critical to ongoing operations, you may not have to do anything but wait.

Yes, the association can also be bankrupt. And, if the association bills have not been paid, that may be the best route to take--discharging all the debts the builder did not pay, and get a clean start. There would likely be little lasting impact on the association. The more worrisome issue is the control over the incomplete/unbuilt units. They could be tied up for years.

If the association has been incorporated, and maybe if it has not, it can become a creditor. The association may be owned money. It is difficult to say. Business bankruptcies, particularly in which there are multiple layers of corporate organizations are incredibly complex.

I doubt if it would be useful for you to form another homeowners association without permission from the court. It would not likely be recognized.

You and your neighbors need to engage a bankruptcy attorney to represent your interests. Your attorney will most likely ask that association funds be separated, and that existing assets of the builder be used to continue necessary maintenance, security, etc. for current homeowners.

It may be possible for individual homeowners as a group to be recognized as creditors. In federal bankruptcy court, a trustee will be appointed, and a creditors meeting will be scheduled in which your attorney can question the corporate officers under oath. You will also have access to all the paperwork to see just what the actual impact is or will be.

Don't look for this to be inexpensive, and don't expect it to be resolved in less than a year or two. The problem here is resolving the control of the builder over the association. The federal bankruptcy judge can order the separation, but the builder's other creditors can object.

There is some hope, however, Most bankruptcy judges take a kindly view toward situations such as yours, and will do everything possible to do the best for homeowners. They understand the need for the association to continue operations. Only if other creditors object will you run into problems.

Lynda, check with the planning commission who approved the development. Determine if the developer had to post a bond prior to getting approval for the development. Talk to the developer about turning over control of the HOA to the current homeowners. And a good attorney may be needed. Yes, sometimes an attorney may be needed for situations other than when one must go to trial

George,

Seeing that I do not understand leins and forclosure processes, can you answer a couple of questions for me?

In this case, can the members get their association started without the formal turnover or must they wait for the Judge to order it? I am assuming that has not been done from the O.P and it sounds as if they are a corporation. If they can, would any and all of their funds collected under this be held as seperate from the Developers debt? Do we know if these are stand alone homes or condo or villas? The common area would be of much less value if it was stand alone homes which would reduce the value of association owned property? Thanks George

They really do need to have legal counsul for this type of a mess and lets hope that they will get seperation from the developer.

I am not up to speed on current bankruptcy law, so what I say is very general.

Chapter 11 is reorganization, in which the builder continues in business under court supervised receivership. Old debt is frozen and a corporation can secure additional senior debt after filing for chapter 11 to continue operations. In some cases, existing contractual obligations are voided (labor union agreements, supplier agreements, etc.). I don't know what the bankruptcy courts think about contractual obligations in regard to homeowners associations.

Most major management decisions would have to be approved by the bankruptcy court. Thus, if the association were still under developer control, it would require a bankruptcy court order to split it out.

The entire idea behind Chapter 11 is that the corporation continue in operation, rather than being liquidated, so that it can pay off as much of the previous debt as possible.

Chapter 7 bankruptcy is liquidation.

If the association is separately incorporated at this point, or if the state laws require that association assets be held in trust or otherwise accounted separately, then that fact should be reflected in the bankruptcy filing. The rub here is whether or not the developer owes money to the association. If it does, then the association lines up along with other creditors.

The homeowners need to engage an attorney to represent them in this case. It may be that the amount owed to the homeowners association are so small that other creditors will not object to paying that off up front. Often, consumer deposits are honored in full in chapter 7 bankruptcy if they are minor, and other creditors do not object. Such debts are important to a viable, ongoing business.

Since the corporation continues in existence and continues to develop the real estate, it makes sense that it--and the bankruptcy court--would do everything it can to make the association whole.