By Amanda K. Ashley, Altitude Community Law, P.C.
Bankruptcy is one of those mystical creatures that we’ve all heard of but hope we don’t run across. If your association hasn’t yet dealt with an owner who filed or is in an active bankruptcy, don’t worry – you will! In fact, bankruptcy is frequently used by owners to prevent further collection action, stop a foreclosure, or otherwise restructure or assist with ongoing financial obligations that are no longer affordable.
When an owner files bankruptcy, the “automatic stay” becomes effective immediately upon filing of the bankruptcy petition. (11 USC § 362). The stay is in essence an injunction against creditors from pursuing further collection action, including foreclosure, garnishment, or eviction. The automatic stay is generally in effect throughout the course of the bankruptcy, which can be a significant length of time in a Chapter 13 bankruptcy since the Chapter 13 bankruptcy can continue for up to five years.
Most creditors, including associations, are aware of the automatic stay provisions regarding general collection action such as filing lawsuits, attempting wage garnishments, or other legal action. But what many associations are not aware of are the other actions it takes that may violate the automatic stay provision, such as continuing to prohibit an owner from using the association’s amenities (e.g. the swimming pool) once an owner files bankruptcy. While an association can prohibit an owner from using its amenities due to the owner’s delinquent account (assuming the association is acting pursuant to its collection policy, of course), once that owner files bankruptcy, the association must cease all collection action. In other words, if the association does not unlock the amenities for that owner, the owner will likely have a strong case that the association has violated the automatic stay provision since the lockout is likely a type of collection action utilized by an association to prompt an owner to become current on an account.
An association’s recourse then, in light of a bankruptcy filing, is to file a motion for relief from the automatic stay since the association is a secured creditor and can petition the court for relief from the stay for cause under § 362.
Failure to obtain relief from the stay or failure to cease all collection action can result in significant penalties for violating the stay, so tread carefully, associations! If a creditor is found to have violated the automatic stay, penalties including sanctions as well as punitive damages can be assessed. Additionally, damages may also be awarded for emotional distress. Keep in mind that whether a creditor intended to violate the stay order is not a consideration in determining whether there was a violation of the automatic stay; rather, the issue generally becomes whether the creditor intended to collect or continue collection in violation of the stay order.
Of course, every situation is different. There are exceptions to the application of the automatic stay which is why each bankruptcy filing should be reviewed individually. This article is purely meant as a starting point and should not be construed as legal advice.
Amanda K. Ashley is an attorney at Altitude Community Law, a law firm specializing in community association law. She works primarily in the Debt Recovery department.