2020 marks the year of COVID-19, economic shutdowns, unemployment, and business closings. However, with approximately $4 trillion dollars in pandemic aid, many individuals were able to avoid foreclosure and bankruptcy. With federal funding providing an additional $600 per week to unemployment checks, many individuals received more in unemployment benefits than they would have received in their paychecks. Mortgage foreclosure moratoriums also assisted individuals financially impacted by the pandemic. What is in store for 2021 with federal stimulus and forbearance plans ending, and unemployment on the rise? 2021 may mark the year of soaring bankruptcy filings.
Condominium Associations and Homeowner Associations will be affected by unit owner bankruptcy filings. Unit owners seeking bankruptcy protection will usually file a Chapter 13 or Chapter 7 bankruptcy. A Chapter 13 bankruptcy is commonly filed by wage earners who seek to consolidate their debts and to repay all or a portion of their debts over a period of 3-5 years (up to 7 years if court-approved). Unlike a Chapter 13 bankruptcy, a Chapter 7 bankruptcy does not involve a repayment plan; a Chapter 7 bankruptcy is commonly filed by individuals whose household income is less than, or equal to, the median household income in their state, and who do not have the income to repay their creditors. A Chapter 7 bankruptcy is a liquidation whereby the bankruptcy trustee sells nonexempt assets to pay creditors, and the individual receives a full discharge of their debts typically within 3-5 months.
When a unit owner files a bankruptcy petition, an “automatic stay” immediately goes into effect whereby an Association must cease all efforts to collect delinquent assessments from the unit owner. The Association also may not suspend the unit owner’s privileges. As more fully explained below, the automatic stay remains in effect until the Association obtains relief from the automatic stay in the unit owner’s bankruptcy case or the bankruptcy case is dismissed or discharged. To provide optimal protection from unit owner bankruptcy filings, Associations should engage in the following tasks:
FILE LIENS
In New Jersey, it is imperative that Associations record liens every fiscal year to secure the arrears owed to the Association. If a unit owner files a Chapter 7 bankruptcy, the liens will survive the bankruptcy, providing the Association with the option to foreclose the liens once the unit owner’s bankruptcy has been discharged. If a unit owner files a Chapter 13 bankruptcy, the liens will secure the pre-petition arrears owed to the Association and place the Association in the position of secured creditor. Secured creditors generally get paid a portion, if not all, of its secured claim in the unit owner’s Chapter 13 bankruptcy plan.
FILE PROOF OF CLAIMS
Once a unit owner files a Chapter 13 bankruptcy, Associations must file a Proof of Claim with the bankruptcy court if it wants to receive payments in the unit owner’s bankruptcy plan. A Proof of Claim provides the court with the total pre-petition amount owed to the Association, and delineates the secured and unsecured portions of the claim. If the Association has liens against the unit, the amount included in the liens can be considered secured. The Association is required to attach relevant provisions of its governing documents, an account ledger and copies of recorded liens to substantiate its claim. Once the Association has filed its Proof of Claim, it may also file an Objection to the unit owner’s proposed Chapter 13 bankruptcy plan if the plan does not accurately provide for the Association’s pre-petition claim and/or the unit owner’s ongoing post-petition obligations to the Association.
MONITOR POST-PETITION PAYMENTS
Associations should carefully monitor their accounting to ensure that the unit owner is remitting all post-petition payments. With both Chapter 13 and Chapter 7 bankruptcy filings, so long as the unit owner holds legal title to the unit, the unit owner has an ongoing obligation to timely remit post-petition payments to the Association as they come due. In the event the unit owner fails to remit post-petition payments, the unit owner’s bankruptcy counsel should be notified of the default. If the default persists for a few months, a motion for relief from the automatic stay can be filed on behalf of the Association. Additionally, once a unit owner’s bankruptcy has been discharged, the Association can proceed personally against the unit owner for any post-petition arrears.
MONITOR FOR BANKRUPTCY DISMISSALS
In addition to the reasons already mentioned, Associations should monitor bankruptcies in the event of a dismissal. Dismissals of bankruptcies can occur for several reasons, including but not limited to, the unit owner’s failure to submit all required documentation or remit payments to the bankruptcy trustee. A dismissal of a bankruptcy matter allows the Association to continue with its collection proceedings as though the bankruptcy never occurred. The Association no longer has to differentiate between pre- and post-petition arrears, and can proceed with collecting all amounts due.
Even with Associations employing all methods to secure arrears and monitor bankruptcies to protect their rights as creditor, there may be obstacles in the bankruptcy case (such as lien stripping) that may impede the Association’s ability to collect the full amounts due and owing. Associations should retain the expertise of counsel that practices bankruptcy and community association law to best protect their interests, and to employ the most effective collection methods.
