Filing bankruptcy can eliminate past due homeowners association dues, assessments, and fees, but you might still have to pay these debts even after your bankruptcy.
Sounds like a typical lawyer explanation, right?
If bankruptcy eliminates HOA dues, why might a debtor ever have to pay these debts after discharge?
The answer has two parts. The first is that bankruptcy is often misunderstood to “wipe away” or “get rid of” debts. It actually does neither.
A successful bankruptcy only discharges a debtor’s legal obligation to repay certain debts. It does not remove or erase these debts. Discharge just means that creditors cannot take any action to collect discharged debts.
This might sound like an unnecessarily technical distinction, but it is very important for debtors who have secured debts.
A secured debt is a type of debt for which the borrower attaches some type of collateral, usually property, that the creditor can seize if the borrower defaults.
Bankruptcy can discharge the debtor’s obligation to repay secured debts, but the creditor’s security lien remains on the property used as collateral. This means that the debtor must continue to repay the debt, even though there is no legal obligation to do so, or forfeit the collateral.
Common examples of secured debts include mortgages, automobile loans, and, at least in Arizona, HOA dues.
HOA Dues and Automatic Liens
When it comes to bankruptcy and HOA dues specifically, there is a lot of conflicting information published online. Some of this is because while bankruptcy is a federal proceeding, it is still subject to each state’s unique laws.
There are other states that enable a debtor to discharge pre-petition HOA dues and fees if bankruptcy is filed before the homeowner’s association records a lien against the property.
So what does this mean for HOA members who want to file bankruptcy?
Most importantly, it means that a homeowners association can foreclose on a property to satisfy past due assessments even after the homeowner declared bankruptcy. This means debtors who want to retain their property after bankruptcy will have to pay all dues and fees or they risk foreclosure.
Ignore the common misconception that the association cannot foreclose if the mortgage is current. The HOA’s security interest in the property is statutory and unrelated to the mortgage.
For debtors who do not want to retain the property, HOA dues and fees can make the precise timing of the bankruptcy more important.
Because even if you intend to surrender the property to foreclosure or sell the property, you will remain responsible for all dues and fees that accrue after your bankruptcy but before the foreclosure or sale. This is why many of the the best bankruptcy attorneys advise their clients in these situations to wait until the foreclosure or sale is complete to file bankruptcy.
Every bankruptcy is unique, though. We do not like to make any blanket recommendations without knowing the debtor’s exact facts and circumstances.
So if you are reading this and contemplating when to file bankruptcy as it relates to your HOA assessment, we encourage you to take advantage of a free consultation with one of our bankruptcy attorneys to receive more personalized information.
HOA Dues — Chapter 7 vs. Chapter 13
The particular type of bankruptcy to be filed is another factor that may influence the best course of action for an individual debtor.
Not all bankruptcies are created equal.
Although chapter 7 is usually the debtor’s preference since it does not involve repayment, chapter 13 can offer more robust benefit, including the ability to cure delinquent mortgage payments and HOA dues over time through the bankruptcy plan.
This may spare the debtor a significant (and possibly impossible) lump sum payment necessary to avoid foreclosure and save their home.