By Stephane Dupont, The Dupont Law Firm
A lot has changed in the community association industry since March 2020, when the COVID-19 crisis began to substantially impact our lives. Many of us are now working from home in our pajama bottoms and dress shirts while engaging in endless Zoom meetings, electronic association meetings, and participating in endless discussions on whether common area amenities should be reopened.
The Colorado legislature was quick to respond to the crisis by passing laws and regulations impacting eviction and foreclosure matters and preventing the filing of many lawsuits for a period of time. Those initial measures, however, have had a relatively minor impact on community association collections.
Collection of association debt is normally a four-step process. The association or community association management company first sends out delinquency letters and a payment plan opportunity to a delinquent homeowner. Next, the homeowner is pursued by the association attorney, who may typically send a demand letter and record a lien. If the debt is not resolved, the next step involves filing a lawsuit in the county where the association is located. The first court appearance is called the ‘return date’ which is the deadline for a homeowner to contest the lawsuit and, in some cases, meet with the association attorney to attempt to work out a resolution or payment plan. In the current COVID-19 world, the requirement or ability to appear at the court return date has been eliminated. The final step of the collections process, collecting the judgment, follows after a judgment enters against the delinquent homeowner --- a court determination that the association is owed a fixed amount of money from a delinquent homeowner. A judgment is typically collected by garnishing funds on account at a financial institution or the wages of a delinquent homeowner.
On June 29, 2020, Governor Polis signed Senate Bill 20-211, which will have a substantial impact on association collections. The law requires associations to send a written notice to a delinquent owner, prior to starting any garnishment proceedings (and other less utilized collection methods), to provide them with an opportunity to object as a result of financial hardship due to COVID-19. No documentation or additional explanation needs to be provided by the homeowner to the association to terminate the garnishment process. The law provides for this protection until November 1, 2020, with a possible extension until February 1, 2021. Additionally, through February 1, 2021, a delinquent homeowner may claim $4,000.00 of funds as exempt from a bank garnishment – this means that even if a delinquent homeowner does not claim COVID-19 protection from garnishment, the association may not be entitled to the first $4,000 of funds on account.
So, what does this mean for associations? The result is that the garnishment process will likely be ineffective for the next several months, except in the rare case where a delinquent homeowner does not object. Unfortunately, this likely means that when the restrictions are lifted, the delinquent homeowners may be further financially indebted with a long road ahead for the association to collect. The new law, thankfully, does not delay or prohibit any portion of the collections process with the exception of collecting judgments entered against delinquent homeowners.
There are several measures that an Association can take to stay ahead financially, given the new restrictions and current economic climate. Here are some suggestions on how to minimize the impact to your association from the new law and general economic downturn:
- Given the inevitable delays in the collections process, an association may want to consider extending a longer payment plan to a delinquent owner than they would normally approve. Further, consider waiving soft costs such as late fees and interest charges. However, work with your legal counsel to determine objective criteria for how you will work with owner requests for payment plans so that you have a policy to apply such measures.
- An association may consider strictly enforcing its mandatory collection policy to ensure that delinquencies are being processed as efficiently as possible to maximize cash flow to an association.
- Some associations have realized cost savings from shutting down their common amenities, due to safety concerns for COVID-19. In some cases, these cost savings may be sufficient to offset any loss of association income from delays in the collection process.
- Start discussing possible increases to the 2021 budget to help hedge against a likely rise in delinquent association assessments.
- As a last resort, an association may consider foreclosing its lien against a delinquent homeowner. This suggestion is especially pertinent to older collection matters that started prior to the COVID-19 crisis.
A meeting in the near future with your board, community association manager, and attorney to develop a strategic plan to hedge against future delinquencies may help your association to stay ahead of the curve.
Stephane Dupont is an attorney with The Dupont Law Firm in Parker, CO, with over 20 years of experience representing community associations. email@example.com