October 26, 2014

Are You Liable for Ongoing Homeowner’s Association Dues if You Surrender Your House in a Bankruptcy?

HOA lawsuitEarlier this month on my Atlanta-bankruptcy web site blog I discussed an interesting case involving mortgage loan deficiency claims that was issued by the Georgia Court of Appeals and Georgia Supreme Court.  In the River Farm vs. Suntrust case, the Georgia courts ruled that a mortgage lender could sue a defaulted borrower on the promissory note and thereby bypass the deficiency confirmation process associated with a foreclosure.  This ruling is important because property values in Georgia have been trending downward and more and more often I am seeing cases where the balance due on a mortgage exceeds the fair market value of my client’s home.

This court case should be of concern to you if you intend to walk away from your home because you are delinquent or if your are so “underwater” with your mortgage that it does not make sense to fight to keep a home that may never be worth what is owed on it.   If you do walk away (without filing bankruptcy), your lender may sue you on the mortgage loan contract instead of foreclosing.  The lender would refrain from foreclosing to avoid a legal requirement associated with foreclosure that would require the lender to appear before a judge to argue that the foreclosure sale price was reasonable.

In my article, I pointed out that this change in the law might encourage more people to file bankruptcies since a bankruptcy can discharge any deficiency claim.

However, there is another potential problem area that could arise if your lender holds off on foreclosing.  This problem area relates to homeowners’ association (HOA) dues.

Under Georgia law, homeowners’ associations enjoy special protections.  Unpaid dues can automatically can become liens that encumber your property.   As HOA lawyers read the law, if you file a bankruptcy and surrender your home, your delinquent HOA dues as of the date of filing will be discharged.  However, ongoing dues that accrue after the filing remain your obligation until title passes.  In other words, if your HOA dues are $100 per month and you file Chapter 7 bankruptcy on February 28, your dues begin accruing again on March 1.  If your lender does not foreclose until November, you would, in theory, be responsible for 8 months of dues, or $800, after your filing, even though you have stated  your intention to surrender your house in bankruptcy.

Obviously, a provision of the law that involuntarily re-obligates you to hundreds or thousands of dollars of monthly dues on an asset you have surrendered seems contrary to the public policy associated with bankruptcy.  Nevertheless, this is how lawyers for homeowners’ associations read the law.

I discussed this issue with an attorney at a law firm that represents HOA’s in the Atlanta area and throughout Georgia.   This lawyer offered the above explanation of the law but he said that as a practical matter, his firm has not and does not plan to sue a homeowner for HOA dues that arise after a bankruptcy case has been filed, as long as the homeowner vacates the premises.  However, the homeowner is presumably fair game if he remains in the house (or rents it out) while the bank is dilly-dallying about foreclosing.

He also advised me that his firm does not report post-petition HOA delinquencies to credit bureaus.

The problem here, of course, is that the HOA lawyer’s explanation of policy is just that – a voluntary policy.  Is it possible that this HOA law firm or one like it could change its policy?  Is it possible that the HOA itself might sell this receivable to a debt buyer who would not hesitate to sue you?

I would not assume that an HOA or a debt buyer will necessarily write off otherwise collectible debt, but until this issue is litigated in a Georgia court, we will not know the answer to this issue.  I do think that a homeowner who remains in a house after surrendering that house in a bankruptcy will face an increased likelihood of an HOA lawsuit.  I will also continue my practice of rejected the HOA contract as part of my bankruptcy filings.

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Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.
About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

Comments

  1. This comes up in my practice frequently. Usually the dues are a few hundred–at most–per month, and the home will be foreclosed quickly, so this isn’t too big of a concern. However, where dues are huge (I have one where the dues are $900 a month for a condo owner) this is a big issue. The normal way to address it is to wait until the foreclosure has occurred, if possible. But the problem with that is that the debtor then has a foreclosure on his credit report along with the bankruptcy. Filing prior to foreclosure is one way to avoid that.

    I suspect most HOAs–even the big ones with money to throw at collection efforts–are handling this as the lawyer you spoke to indicated. They are really concerned with “free loaders” who keep the property after bankruptcy and yet continue to live there or rent it out.

    Great post on a timely subject!

  2. Russ, is South Carolina law as ambiguous as Georgia’s when it comes to the rights of HOAs to pursue on-going monthly assessments even after a debtor surrenders his home in a bankruptcy?

  3. We filed for Chapter 7 in california and included our home as part of the fiing and received a full discharge. The bank holding the mortgage did not legally take back the home for some 36 months and now the Home Owner’s Association wants us to pay $10,000 plus when we kept our dues up to date until we vacated the property. Is this allowable in California and is there any case law and rulings on this issue and under what circumstances? We did not want to file, but my wife lost her job when a international healthcare firm filed for Bankruptcy and i had 2 major cervical spinal cord surgeries preventing me from continuing in the management of our LLC resulting in the loss of major income. We need help on this if possible. Thanks.

  4. Ron, the problem you describe is also a problem in Georgia, where I practice. I believe that there is some case law in other states that disallows homeowners’ associations from pursuing assessments when property was surrendered in a bankruptcy – this might require you to retain a real estate lawyer there to research this issue and raise a defense to any collection action. The problem, of course, it can be very expensive to be a test case – perhaps you can find a public interest group to take on this cause and fund what could be extensive litigation. Good luck.

  5. @Ron Haller:
    Ron, I am experiencing the same… I have HOA dues that accrued for approx 1 year at $600 per month. My BK was in 2007 and I was unaware of the debt for 3 years. I now have a lawyer representing a collections agency that is relentlessly coming after me. I am wondering if you have any additional advice…. ???

  6. Richard Young says:

    Check out 11 USC 523 (a) (16)

    It may mean that the association can keep on charging you for dues after bankruptcy if you are still on title to the residence, until the lender actually changes title. So maybe they could just hold up the title changes and you are still on the hook for the association dues whether you live there or not.

    Remember, the congressman/senator in your district or their predicesssor may have voted to pass the bamboozal on the average American. Might be a good idea to call up your senator or congressman and ask if they or their predecessor voted for it and whether or not

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