Recent Case Highlights Dangers of Collections in a Bankruptcy
Bankruptcies are governed by federal (national) statutes and case law. Under current authority, an owner may be shielded from the collection of certain HOA assessments. In general, a bankruptcy begins with the filing of a bankruptcy “petition.” At the conclusion of the bankruptcy, with limited exceptions, debts incurred prior to the filing of the petition (“pre-petition debts”) are “discharged” meaning the debts are wiped away and can no longer be enforced against the individual. In the HOA context, this typically means that assessments incurred prior to filing of the bankruptcy petition are deemed discharged and the only recourse that the association may have is to file a proof of claim to enforce an assessment lien against the property (generally in a Chapter 7 bankruptcy) or to become part of a payment plan (generally in a Chapter 13 bankruptcy). To the extent that assessments arise after the filing of the petition, the debts are generally not dischargeable and may be subject to collection. Separate and apart from whether a debt is discharged, the bankruptcy “automatic stay” rule prevents any attempt to collect a pre-petition debt while the bankruptcy is pending but before the discharge occurs. Note that Chapter 7 and Chapter 13 bankruptcies may be subject to different rules depending on the circumstances. In sum, the automatic stay prevents attempts to collect a pre-petitions assessment against an individual outside of the bankruptcy, and the discharge injunction prohibits collection at the conclusion of the bankruptcy. Liens against the property may be enforced.
In a recent case demonstrating the application of these rules, In re Terrell (ND Ill 2020), the HOA’s attempt to collect pre-petition assessments resulted in sanctions against the HOA for violating the discharge injunction and required the HOA to pay its owners’ attorney’s fees. In March of 2019, the owner filed a Chapter 7 bankruptcy petition seeking to discharge almost $18,000 in pre-petition assessments. Shortly thereafter, the court discharged the owner’s assessment debt while the owner remained current in paying her post-petition assessments. Nevertheless, the HOA initiated an eviction action for payment of the pre-petition personal debts of the owner. The court ruled that the attempted eviction action based on the per-petition debts of the owner violated the discharge, though the court noted that a foreclosure action based on the lien created against the property could have proceeded. The court found a clear violation of the discharge and required the HOA to pay thousands of dollars in legal fees and costs.
Bankruptcies aren’t always simple and the penalty for violating certain rules can come with hefty fines. If you or your community have any questions about collections or their intersection with bankruptcies, please feel free to call any of our general counsel and collections counsel.