ARE PRE-BANKRUPTCY ASSESSMENTS RECOVERABLE?

Collection of Pre-Bankruptcy Association Assessments . . . It Can be Done

When a homeowner in an association, files for chapter 7 federal bankruptcy protection, bankruptcy law triggers certain rights and responsibilities for that homeowner and the association as they relate to that homeowner’s responsibility to stay current on his assessment account. One of the outcomes of a successful chapter 7 bankruptcy is the person who filed for bankruptcy (known as the “debtor”) receives a discharge, meaning he is no longer personally responsible for most debts he owed as of the date he originally filed for bankruptcy protection (“pre-petition debts”). Does this mean an association must write-off any assessments a homeowner owed when he filed for bankruptcy? Fortunately for associations, state and federal law allows an association a procedure to enforce the pre-petition assessment obligation following the conclusion of a chapter 7 bankruptcy.

While a homeowner who has completed a chapter 7 bankruptcy is no longer personally responsible for pre-petition assessments, the association still maintains its lien for unpaid assessments in the property because a bankruptcy discharge does not remove those lien rights. As such, even though the homeowner is no longer obligated for the assessments, the property itself still “owes” it. This idea is like a mortgage; if an owner does not make his mortgage payments, the bank has the option of forcing a sale of the home because the property itself owes the money in a legal sense. In Illinois, an association can enforce its lien by seeking an in rem judgment (a judgment against the property only, not against the homeowner) in an Eviction action, also known as an eviction. If the association obtains an in rem judgment for unpaid pre-petition assessments, the Illinois Eviction Act when combined with federal bankruptcy law allows the association to evict the occupants of a unit unless the entire assessment arrearage, including the pre-petition balance is paid.

Because an in rem judgment can be a powerful collection tool, an association should not immediately write-off an assessment balance when it receives a chapter 7 bankruptcy notice. That being said, the association must very carefully follow the steps to obtaining an in rem judgment for pre-petition assessments because any attempt to collect a pre-petition debt from the homeowner personally could be a violation of federal law and subject the association to severe penalties. Above all, the association should keep separate account statements for the pre-petition and post-petition (assessments that accrued after the homeowner filed for bankruptcy) balances and should send invoices for only the post-petition account to the homeowner. Therefore, if the board or property manager receives notice that a homeowner has filed for bankruptcy protection, please contact our office so we can help the association avoid violations of federal bankruptcy law while also ensuring the association can collect the maximum number of assessments to which it is legally entitled.