BEWARE: Bankruptcy Do’s and Don’ts

If your Community Association has been spared from bankruptcy in the last decade count yourself lucky.  Bankruptcy, in general, is intended to (1) provide a fresh start for the honest, but unfortunate debtor (delinquent owners), and (2) provide equal treatment of all Creditors (including the Association).  Unfortunately, Bankruptcy has also become a safe haven for delinquent owners who file bankruptcy in bad faith simply to delay a foreclosure sale without any real intention of actually organizing their debts and completing the bankruptcy plan.  While an Association cannot prevent an owner from filing for bankruptcy there are some steps you can take to mitigate the impact of a bankruptcy filing.  Here are my top eight Do’s and Don’ts:

  1. DO: Implement and follow a strict collections policy that includes turnover of delinquent accounts no later than 90 days from the date of delinquency.  The longer you hold off on pursuing collections the higher the amount of the debt and the bigger the exposure to the Association should the Debtor value the Association’s lien in a Chapter 13 Bankruptcy.  Often times a Debtor will wait until the date of the foreclosure sale to file a Chapter 13 Bankruptcy and if the amount owed to the first mortgagee is more than the value of the property the Debtor can strip the secured status of the Association’s claim of lien and only pay a fraction of what was owed prior to the bankruptcy filing (pre-petition debt) through a 36 or 60 month bankruptcy plan.
  2. DO: File a Proof of Claim.  Secured creditors must file a proof of claim for the claim to be allowed.  The deadlines for filing a proof of claim have been tightened in recent years.  Failure to file a proof of claim may prevent the Association from collecting its pre-petition debt.
  3. DO: Continue to send routine correspondence to debtors, including but not limited to annual meeting notices, coupon books, meeting notices to levy a special assessment.
  4. DO: Notify your bankruptcy attorney of any changes in post-petition maintenance including special assessments or regularly accruing maintenance BEFORE they come due.  Assuming the post-petition maintenance is being paid inside the bankruptcy plan a Creditor must notify the Bankruptcy Court, Debtor, Debtor’s counsel, and Trustee of any change in the amount of the maintenance 21 days before the change is to take effect.  Failure to notify the Court and the parties of this change could prevent the Association from collecting on the difference owed at all.   
  5. DON’T: Try to collect, enforce, or otherwise pursue an owner for any amounts owed prior to the filing of a bankruptcy petition.  This could be a violation of the automatic stay in Section 362 of the Bankruptcy code.
  6. DON’T: Charge the debtor late fees or interest while the bankruptcy is pending. Only if the Association’s claim is secured is interest collectible.  A conservative approach is to keep both the interest and late fees off the Association’s ledger for the pendency of the Bankruptcy.
  7. DON’T: Send the delinquent owner an invoice for any amounts that came due prior to the filing of the bankruptcy petition.  Unless or until your bankruptcy attorney has advised you that the stay has been lifted do not send the debtor an invoice for amounts owed.  If you know that the debtor has filed for bankruptcy yet innocently sent the invoice, the Bankruptcy courts will consider this a knowing violation of the bankruptcy stay and the Association would be responsible for any damages, such as legal fees incurred.
  8. DON’T:  Try to handle a bankruptcy on your own.  Immediately upon notice of a bankruptcy filing contact your community association attorney or a bankruptcy attorney who specializes in representing creditors.  Bankruptcy is not only a complicated process with long term financial and legal consequences, but a corporation must be represented by a lawyer in Federal Bankruptcy Court.  Only in very limited circumstances according to local rules can a corporation perform certain acts on its own such as filing proofs of claim and filing a request for service.

Written by Candace C. Solis and originally posted to the FL Condo HOA Law Blog