Chapter 7 Bankruptcy: JUST KEEP SWIMMING: NAVIGATING THE WATERS OF A CO-OWNER’S CHAPTER 7 BANKRUPTCY FILING

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Chapter 7 BankruptcyBy: Melissa D. Francis, Esq.

Bankruptcy matters (chapter 7 bankruptcy) can be treacherous waters for Condominium Association Boards to navigate. Such issues should, in most cases, be referred directly to the Association’s legal counsel, who should be experienced in handling Condominium collection cases in the bankruptcy context. Nevertheless, Board members (and property managers) should at least be familiar with the basic aspects of Bankruptcy law that apply to Condominiums. This blog post will address some of the fundamentals of Chapter 7 Bankruptcy cases in relation to Condominiums.

A Chapter 7 Bankruptcy cases is often referred to as a “liquidation bankruptcy.” In this type of Bankruptcy, a Trustee is appointed to review the Chapter 7 filing and examine the Co-owners’ assets to determine if any items can be sold to generate funds for the estate allowing Creditors to receive payments. In a Chapter 7 Bankruptcy case, the Co-owner has two choices as to the treatment of the Condominium Unit: retain the property, or surrender the property.

When a Co-owner chooses to retain his Condominium Unit and owes amounts prior to filing, the Co-owner would be able to discharge any personal liability for assessments owed prior to the date of filing, but these amounts would still be a lien against the unit. Additionally, the Co-owner would be responsible to pay any amounts due from the date of filing forward, including legal fees and costs, as the personal liability for these amounts is not discharged.

The Association does have options which may allow it to collect the pre-filing amounts owed. The Association, through its counsel, could seek to have the Co-owner sign a Reaffirmation Agreement. A Reaffirmation Agreement allows the Association to collect amounts due prior to the bankruptcy filing from the Co-owner personally as, by its terms, it keeps the personal liability the same as if the Co-owner had not filed for bankruptcy. A Reaffirmation agreement also allows for a payment arrangement to be agreed upon as to the amounts due at the time of filing. After the Reaffirmation Agreement is signed, it is filed with the Bankruptcy Court.

If a Co-owner chooses to retain the Condominium Unit but does not sign a Reaffirmation Agreement for the personal liability for amounts due prior to the filing of the bankruptcy, the Co-owner will receive a discharge from her personal liability and the Association may not pursue the Co-owner for the pre-filing amounts. However, the Association is not barred from taking action against the Condominium Unit itself and may foreclose its lien against the property to recover the past due amounts. The Association must retain experienced counsel to handle these types of foreclosure proceedings to ensure that the pleadings are properly worded and do not violate the Chapter 7 discharge. Violation of a Bankruptcy discharge can subject an Association to sanctions imposed by the Bankruptcy Court.

When a Co-owner chooses to surrender his Condominium Unit and owes amounts to the Association prior to the filing, the Co-owner would be able to discharge any personal liability for assessments owed prior to the date of filing, but these assessments would still be a lien against the unit. The Co-owner would remain responsible for paying any assessments due from the date of filing up until the date on which the mortgage company or other entity takes title to the unit, as these assessments are non-dischargeable. If the Chapter 7 Trustee finds assets which can be sold, the Trustee will advise the Co-owner’s Creditors to file a Proof of Claim in the Chapter 7 case advising the Trustee of the amount it is owed by the Co-owner pre-filing. When the Trustee disburses the funds, a percentage of those funds will go to the Association to satisfy its pre-filing claim. Upon discharge and closing of the Chapter 7 case, the Association may pursue the Co-owner for any amounts accruing after the case filing which remain unpaid, and it may take action to foreclose its lien on the property.

If a Board member or property manager receives a Notice of Bankruptcy Filing about a Co-owner, it is imperative that he or she forward the Notice immediately to the Association’s experienced legal counsel for review and evaluation. At a bare minimum, the attorney should file a Notice of Appearance to receive copies of all documents filed in the case, review the Bankruptcy Schedules, and determine what other documents may need to be filed to determine the Co-owner’s intent as to his or her retaining/surrendering the Condominium Unit. Time is often of the essence in regard to the actions that the attorney will need to take to protect the Association’s interests in the Bankruptcy proceedings. With the help of an attorney experienced in both Condominium and Bankruptcy law, Associations can avoid “swimming upstream” financially when Co-owners file for Bankruptcy.

Melissa D. Francis is an associate attorney who joined the firm in 2013. Before joining the firm, Ms. Francis worked for many years almost exclusively as a bankruptcy attorney. She has extensive experience and knowledge about protecting the interests of Condominium Associations and HOA’s in bankruptcy proceedings.

You can reach Melissa at our Plymouth office at 734-459-0062 or via email at mfrancis@zdfattorneys.com.

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