Bankruptcy is a complex federal court process favoring debtors. This means, in the case of associations, that delinquent homeowners are protected from collection enforcement during the bankruptcy case. Once a homeowner files for bankruptcy protection, an automatic stay is triggered and the association must stop all collection efforts.
Becoming familiar with the basics is an easy way to grasp the bankruptcy process. Click here for a Glossary of Bankruptcy Terms. A bankruptcy proceeding is started by the filing of a bankruptcy petition. Hence, the filing date is also known as the petition date. The paralegals at the firm will refer to pre-petition delinquencies and post-petition delinquencies. The pre-petition delinquencies are those which accrue up to and including the petition date. Post-petition delinquencies begin to accrue the day after the petition date.
There are generally two types of bankruptcies a homeowner will file, a Chapter 7 liquidation or a Chapter 13 personal reorganization. The law usually requires a homeowner who has a job and can pay off his or her debts over time to file for Chapter 13 protection. The main difference between the two types of bankruptcies is that a Chapter 7 bankruptcy takes approximately 4 or 5 months to complete, while the Chapter 13 bankruptcy can remain in effect for up to 5 years. Note that Chapter 11 is a business reorganization, but works for a homeowner with assets over approximately $1 million like a Chapter 13 bankruptcy.
Once a homeowner files for bankruptcy protection, the association makes its claim by filing a proof of claim, a document which describes the association's claim against the homeowner. If an assessment lien is in place, the claim is filed as a secured claim, and includes all amounts due and owing to the date of the filing of the proof of claim. If an assessment lien has not been recorded prior to the petition date, the claim is filed as an unsecured claim, and includes only those amounts due and owing prior to the petition date.
If the debtor successfully completes a bankruptcy, she receives a discharge of debts: an order of the court preventing creditors from ever collecting delinquencies which accrued prior to the petition date. The discharge applies to the person, not to property, so it does not affect a lien.
If a homeowner files for Chapter 7 bankruptcy protection, the wise course of action for an association is to wait out the four or five months it takes from filing, to discharge, to termination of the automatic stay. Once the case is terminated, the association can begin collection efforts (as to post-petition delinquencies) if the debtor still owns the unit. If a homeowner files for Chapter 13 protection, the association needs to consider making a Motion For Relief From Stay. This Motion asks the court for permission to pursue collection efforts as to post-petition delinquencies. A bankruptcy debtor who files for Chapter 13 protection is supposed to keep up with his post-petition payments. If he does not, then the association has grounds to obtain a relief from the stay.
Bankruptcy is complicated and slow. It is a good idea to wait a few months, or even a year or more, to file for relief from stay in a Chapter 13 bankruptcy, because if the debtor fails to make his installment payments under the Chapter 13 plan, the case could be dismissed (i.e., the case is terminated without a discharge being granted). As soon as a member of the firm learns of a bankruptcy filing, the collection effort must be evaluated in light of the bankruptcy statutes.