Homeowners association dues aren’t usually at the top of the list of worries for someone struggling with an unmanageable load of debt. Compared to delinquent mortgage payments, credit card debt, and medical bills piling up, the monthly or quarterly dues a homeowner might pay to keep the hedge trimmed may feel pretty insignificant.
But after a bankruptcy case finishes and a debtor’s financial ship finally begins to steady itself, HOA dues are still there. And, if you still own the home, HOA fees will in fact come due.
At the Sasser Law Firm, we help individuals and businesses across North Carolina avail themselves of bankruptcy protection when it is necessary to reestablish their financial well-being. Our compassionate consumer bankruptcy attorneys work diligently to make sure our clients plan for ongoing expenses such as HOA fees as they restructure their finances and deal with the overall impact of a bankruptcy.
How HOA Fees May Figure Into Your Bankruptcy
Imagine you are a homeowner with an association or condo fee of $100 per month. The money you pay goes toward keeping the clubhouse clean and the common areas of the community well maintained. When you lose your job, you fall behind on all your bills – including your HOA dues – and after six months, you file for bankruptcy protection.
At the time you file a bankruptcy petition, you owe the HOA $600. That $600 pre-bankruptcy debt will be discharged in your case if the HOA has not yet filed a claim of lien on your house.
But the very next month, the clubhouse gets cleaned as usual, the landscapers arrive to cut the lawn, and you get another $100 bill in the mail. This bill is post-bankruptcy and must be paid.
But what happens if you have moved out of the house and told the bank you intend to surrender it? Nothing changes. The owner of the house is responsible for the post-bankruptcy HOA fees regardless of the owner’s presence in the house or even the owner’s desire to surrender the house to the bank.
This can be confusing, because one of the attractive features of surrendering a home in a bankruptcy case is the feeling of relief and conclusion. “Finally,” a debtor thinks to himself, “all the stress, all the hassle of mortgage-modification programs that go nowhere; it all ends now.” To a large extent, that is true.
Are HOA Fees Dischargeable in a Bankruptcy Filing?
A successfully concluded bankruptcy case discharges, or alleviates, the debtor of any mortgage-related liability on a surrendered house.
An individual would indicate their decision to surrender their home on the Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy. HOA fees accrued up to the date of the bankruptcy filing would be discharged as part of the proceeding.
In a Chapter 13 bankruptcy, outstanding pre-petition HOA dues may be treated as an unsecured claim. If the HOA fails to execute its lien outside of bankruptcy, the homeowner’s liability for pre-petition HOA dues would be discharged upon completion of your Chapter 13.
Alternatively, the debt to the HOA could be satisfied from a foreclosure sale or other disposal of the property, if that were to occur.
What Does it Mean to ‘Surrender’ Property in a Bankruptcy?
Surrendering a house in a bankruptcy is different from actually transferring ownership to a third-party or back to the bank. “Surrendering” simply indicates a debtor’s intent.
In a bankruptcy, the debtor may agree to surrender secured debt, which are loans the debtor guarantees with property. These are typically a mortgage or car loan, in which the real estate or vehicle, respectively, serves as collateral on the loan.
If a debtor cannot repay a secured loan, he may surrender the collateral to the creditor, such as in a bankruptcy. Surrendering a home to the creditor — a bank, usually — allows the bank to sell the home to recover its losses.
After a bankruptcy confirmation hearing in which a home is surrendered, the court will allow the mortgage lender to take possession of the home. Within 90 to 120 days, the bankruptcy court will set a date for the foreclosure sale.
Until the sale, the ownership of the home has not changed, and HOA fees will continue to be charged to the homeowner. A year could pass between surrendering a home and the actual transfer of ownership to a new owner.
During that time, it is important for the person dealing with bankruptcy to be aware that he or she is still responsible for continuing HOA fees. This is new debt not covered by the bankruptcy declaration, and you can expect that it will be pursued if not paid.
Surrendering Property and Liens on Debts
A debtor who files bankruptcy and wishes to surrender a property must state his or her intention to do so before a creditor who holds a lien on the property moves to foreclose.
In a secured-debt loan, the creditor holds a lien on the property, which allows the lender to seize the property if the borrower fails to make monthly payments and meet the terms of the loan. The creditor must “perfect” the lien, a legal filing which, once completed, allows the creditor to take possession of the property. In some cases, a homeowners association contract may place a lien on a members’ property, allowing the HOA to foreclose to collect delinquent payments.
Because of liens on a mortgage, car, or other property or debt, it can be a mistake to put off bankruptcy too long once you have fallen behind on payments. You could forego some of bankruptcy’s legal protections if a creditor exercises the option to foreclose.
Do Not Ignore HOA Fees After Bankruptcy
To summarize: Delinquent HOA fees accrued prior to filing for bankruptcy can be discharged and forgiven as part of the bankruptcy proceeding. However, as long as you own your home you will continue to be responsible for HOA dues. Surrendering a home as part of bankruptcy does not immediately change your ownership status. You will be charged monthly HOA fees as you go through bankruptcy until your home is sold.
Other than doing your best to cooperate with the bank to help expedite the sale of a surrendered home, there is not a lot a homeowner can do except to keep that monthly $100 dues expense in the family budget. That, and enjoy the nice clean neighborhood clubhouse. After all, you’re paying for it.