By Kiki N. Dillie, Esq, Altitude Community Law
When a management company or board becomes aware of a homeowner being foreclosed on by their mortgage company and/or being in bankruptcy, often the first question is “What does this mean for the Association?” With reports that the economy may be taking down turn in the near future, foreclosures and bankruptcies are likely to increase and impact more and more associations.
Foreclosure: When a homeowner’s mortgage company is foreclosing, the homeowner legally remains the owner of the property until approximately the 9th business day after the foreclosure sale. (The exact date depends upon whether there are junior lienholders that want to redeem the property after the sale.) The homeowner remains personally responsible for any assessments that come due while they are the owner, so they are obligated to pay whatever comes due up until the sale actually happens, even if the sale is continued several times and/or if the homeowner moves out of the property before the sale.
Even after the sale, the homeowner remains legally responsible for any assessments due while they were the owner, minus the superlien amount. The foreclosure sale does not end that responsibility and the homeowner can be collected against for that amount, even after the sale is completed. Practically speaking, if the homeowner moves out of the property and can’t be located, it might not be a good use of the Association’s funds to continue to try to pursue the homeowner and it might be a good idea to consider writing off the balance to bad debt, but that depends on the individual circumstances.
In Colorado, the superlien also takes effect in these situations. When a foreclosure is initiated, the superlien comes into existence. This lien is valid for any assessments that came due in the 6 months prior to the foreclosure being initiated and remains against the property even after the foreclosure, if not paid sooner. Sometimes the foreclosing mortgage company will pay the superlien during the foreclosure process, but if not, the superlien will have to be paid at the time the post-foreclosure owner attempts to sell to a new owner.
Bankruptcy: Whether or not the homeowner is personally responsible for assessments in bankruptcy is more complicated and depends on the type of bankruptcy filed, as well as other factors.
Chapter 7 Bankruptcy: This type of bankruptcy is most common when the economy is bad and people are either unemployed or severely under employed. In a Chapter 7, after the bankruptcy is filed, the Association can no longer contact the homeowner about the balance due. This includes sending letters regarding the balance. Once the homeowner receives a discharge, they are no longer personally responsible for the balance due as of the date the bankruptcy was filed. They remain personally responsible for any assessments that come due after the date the bankruptcy was filed through the date that they no longer owner the property. Additionally, the lien remains against the property for the full balance due, so if the homeowner retains the property through the bankruptcy and later sells to a new homeowner or refinances, the full balance due, including any pre-bankruptcy balance, can be collected at closing.
Chapter 13 Bankruptcy: This type of bankruptcy is more common in good economies when people are employed, but just have too many debts and need time to repay their creditors. When a homeowner files a Chapter 13 bankruptcy, the Association can no longer contact the homeowner or any other co-debtors about the balance due. Whether or not the Association will be repaid the pre-bankruptcy balance will depend on if the homeowner retains the property or surrenders it, so this varies case to case. Also, even if the homeowner intends to retain the property, the Association will have to file documents with the Bankruptcy Court very quickly after the bankruptcy is filed in order to validate their claim and actually get paid. If the documents are not filed timely, the Association likely won’t receive payment, even if they otherwise would have been entitled to payment.
In either a Chapter 7 or 13, it is very important to contact the Association’s attorney right away after being notified of the bankruptcy filing, so the attorney can get the required documents filed timely and protect the Association as much as possible through the bankruptcy.
If you have any questions about the impacts of a foreclosure or bankruptcy on an association, it is best to contact the Association’s attorney to get the best advice on how to handle that particular situation.
Kiki is a partner with Altitude Community Law and runs the debt recovery department. She has an extensive understanding of all areas of association debt recovery, but also has experience with foreclosure, covenant enforcement, and transactional issues. Kiki has taught dozens of classes for managers and board members in a variety of association-related subjects.
