Bankruptcy and Home Owners Associations:
What you need to know.
April 16, 2007
Aggressive HOA law firms are going after individuals who have filed for bankruptcy protection, and they are winning. This is bad news for individuals who have purchased real estate over the last few years using adjustable rate mortgages (ARMs). As interest rates have climbed, many home buyers have been forced to surrender their property to the bank. But that is just the beginning of the HOA nightmare.
Under state law, HOAs are collecting on post bankruptcy petition debts. Their theory is that the debt was incurred after the petition was filed and, therefore, was not discharged. Until the title actually passes back to the bank, they are successfully collecting on post-petition assessments.
So . . . just when you, as a consumer, think you are getting back on you feet, bam! The HOA firm comes after you with a civil suit and a potential garnishment is not far behind. “But wait! I just filed bankruptcy!” you protest. “Aren't I protected?”
No, you’re not. The HOAs are successfully going after the assessments they are owed post petition. The credit nightmare is not over for you, and credit rehabilitation is useless (see my other articles). Forget about buying another home in the next year. It won’t happen. Not with sub-prime lenders running for the hills and your credit being destroyed by a debt you thought was handled in your bankruptcy.
Is there any good news? Yes, because there are a couple of ways to deal with this problem. First, if your debt is fairly small ($500 or less), the HOA is not going to pay its attorneys to chase it down. That said, the sure-fire way to deal with them is to stop making the mortgage payments prior to the bankruptcy being filed. Then call the bank and tell them you want to surrender the house. Ask if they will accept a deed in lieu of foreclosure. If they will, once the title passes, you are off the hook for the HOA assessments. If the bank will not accept the deed in lieu of foreclosure, do anything you can to light a fire under their foreclosure department (this may be hard, because of the high foreclosure rate in Colorado).
After the foreclosure is complete and title has passed back to the bank, file the bankruptcy on the outstanding debt (including the HOA dues), and start rebuilding your credit. Be sure that your homeowner’s insurance is being paid until the bank has title. If the house burns to the ground, the risk of loss remains on you, as the consumer, until title has passed. And beware of signing a promissory note to make the deal go through! Such a promissory note is more than likely non-dischargeable in bankruptcy.
The bottom line: until the foreclosure on your property is complete and the redemption period has expired, you must keep a close eye on HOA assessments
