Thursday, June 20, 2013

Bankruptcy filed by condo owner....now what???

An owner in our community filed for bankruptcy...what can and should we do?  Even though the worst of the real estate crisis is behind us, this is still a common question facing association boards. Ever heard of an "automatic stay?" How about the owner doesn't want to pay assessments because they "surrendered" the property to the bank? Or, had an owner say "I don't have to pay assessments anymore because I filed for bankruptcy?" Click on the jump for a complete tutorial on bankruptcy for community associations....



First, some basics about bankruptcy. The US Supreme Court, and various other courts, have quoted that the "principal purpose of the Bankruptcy Code is to grant a 'fresh start' to the 'honest but unfortunate debtor'." While it seems the "unfortunate debtor" may be arguable to many in the present economic environment, nonetheless, that's the ideal. 

In its most basic sense here's how bankruptcy works. It all begins when the debtor a/k/a owner files a petition for bankruptcy. The petition date is the proverbial line in the sand. In that petition the debtor is supposed to list each and every one of their financial assets and liabilities. A suggestion of bankruptcy is sent to all the listed creditors and without any other court action there is an automatic stay that occurs. The automatic stay is a temporary injunction that halts all collection efforts of creditors against the debtor. (yes, there are some exceptions to the stay like tax issues, alimony, etc., but no, none of them apply to community associations). This includes sending demand letters, filing and perfecting liens, filing foreclosure actions. It's arguable whether sending a regular invoice violates the stay but in my experience don't do that either. 

The automatic stay serves two purposes: 1) give the debtor some relief from the collection efforts of the creditors, and 2) allow for an orderly process for creditors to line up and make claims against the debtor/"bankruptcy estate" via the bankruptcy trustee. The automatic stay prevents a literal race of the creditors to collect. During this time, creditors and the amounts they are owed are put into buckets of priority 1) non-dischargeable debts (i.e. student loans, alimony, child support), 2) secured debts (i.e. mortgages and lien holders, people with specific assets they can collect against), and last 3) unsecured (i.e. credit cards).

Once these creditors have all made their claims, the bankruptcy trustee looks at all the assets of the debtor, takes out certain minimum allowances for a car, furniture, and a few personal possessions, and then figures out a way to sell and divvy up the remaining assets to the creditors in order of the priority above.  The creditors get paid usually some percentage less than what they are owed, the rest of the debts are "discharged" from the debtor, meaning the creditor can no longer collect those amounts against that person individually, and everybody moves on.  

There's two major types of bankruptcy that debtors file: 1) Chapter 7; and  2) Chapter 13. Chapter 7 is called a liquidation bankruptcy and Chapter 13 is a restructuring bankruptcy. In Chapter 7, debtors typically have no assets. It's a very stream lined process designed for relatively low income people. In Chapter 7, creditors rarely get paid

The Chapter 13 is a little more complicated. Chapter 13 bankruptcies are for people with a little higher income, some assets, and the ability to repay creditors over time.  Usually they end in some type of repayment plan for the creditors. Most repayment plans are for 5 years/60 months. The figure out how much the debtor can pay each month to get caught up on their debts.  They will then take the amount and figure out how much can be paid to each creditor. It typically ends up that each creditor will get a fraction of what they are owed, payable over 5 years. 
  • Example - owner/debtor owes association $5,000 when they file for bankruptcy. The bankruptcy trustee ultimately decides that all creditors will get .80/dollar and the repayment plan will be over 5 years. The debtor will make its payments to the trustee each month. Then the trustee will divide that payment amongst the creditors each month.  The association will get monthly payments of $66.66 from the trustee for 60 months. Keep in mind though, this is ONLY for the debtor prior to the filing of bankruptcy. The owner is always responsible for each and every payment AFTER the petition for bankruptcy.  
So those are the general ideas behind bankruptcy, the purpose of filing, how each chapter works, and setting the expectation when each situation should arise. 

Here are a few dos and don’ts: 
  • When you get a petition for bankruptcy DON’T panic. 
  • DO create a PACER account. PACER is the federal database for bankruptcy court filings. It's free to light uses and you can track and follow bankruptcy matters there. 
  • DON’T send any demand letters, file files, foreclose, or continue pending foreclose matters. 
  • If you need to contact the owner/debtor DO it through their attorney which can be found on the PACER system above. 
  • If it's a Chapter 13, DO contact an attorney to file a proof of claim.
  • An owner CANNOT be forever discharged from paying assessments. 


Otherwise, if you have questions contact a specialized association attorney or bankruptcy attorney for guidance. 

5 comments:

  1. This comment has been removed by a blog administrator.

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  2. Petitioning for liquidation implies that you are conceding that you can no longer transform your misfortunes into benefits and as a result, you should be liberated from further installment of obligations.

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  3. Great article. I appreciate you mentioning that the right representative on our side makes a tremendous difference in the process, and I completely agree. If I was going bankrupt, I’ll make sure to hire the right bankruptcy lawyer. Thanks for sharing!
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