BANKRUPTCIES AND ASSESSMENTS

One of the most dismaying events during the collection of past due assessments is the filing for bankruptcy by a member. Bankruptcies are governed by Federal law, and are designed to give the "debtor", a new financial beginning or time to reorganize his or her financial affairs.

The provisions of the Bankruptcy Code are very detailed and rival the Income Tax Code in complexity. There are different forms of bankruptcies. Most community associations have been affected by Chapter 7 liquidation, or Chapter 13 reorganization at one time or another.

One of the most significant aspects of filing for bankruptcy is that as of the date of filing the Petition with the Court, all actions to collect debts or enforce judgments are automatically stayed by the bankruptcy filing. The bankruptcy stay prohibits the Association from proceeding with its foreclosure for past due assessments in State Court. Additionally, further contact with the debtor, regarding past due assessments is prohibited. Violation of the stay can result in a finding of contempt of Court fines.

The bankruptcy stay is not totally unfair; it merely requires that all actions pertaining to any claims against the debtor are heard in one forum--the Bankruptcy Court.

The Association may petition the Bankruptcy Court for a number of remedies. The most significant is to ask the Bankruptcy Court to "lift" the automatic stay in relation to the debtor's property, which is subject to the community association's assessments. The Association may also file a Proof of Claim to verify the amount due with the Bankruptcy Court. A request for "adequate protection" requiring the debtor to pay current assessments may also be made. The type of bankruptcy and the facts of each case dictate the best course of action.

Most debtors file a Chapter 7 liquidation. This is known as a straight bankruptcy, where the debts of the debtor are listed and personal liability is eliminated. As the Association is a secured creditor by virtue of the Association's documents, upon the conclusion of a Chapter 7 case, the Association may proceed with a foreclosure of the lien for nonpayment of past due assessments. However, the Association may not also receive a judgment against the debtor individually for the assessments.

Many Associations find that members file a Chapter 13 bankruptcy, which allows the debtor time to file a repayment plan for the past due debts. A Chapter 13 case may be open from three to five years. During the term of the case, the debtor is required to make payments to the bankruptcy trustee, who in turn, distributes funds to the various creditors, according to the terms of the plan. In a Chapter 13, it is essential that the Association verify the amounts due by filing a Proof of Claim, as the plan will repay the creditors based upon the amounts listed by the debtor or as filed in a Proof of Claim by a creditor. Due to the duration of a Chapter 13 proceeding, Associations also usually request relief from the automatic stay and/or an order for adequate protection.

Condominiums and cooperatives have clear authority in the Bankruptcy Code to require that a debtor pay current assessments if the debtor is continuing to reside in the property or if the debtor is receiving rent for the property.

The Bankruptcy Court is part of the Federal Court system and is governed by the Federal Rules of Civil Procedure, along with additional Federal and Local Rules of Bankruptcy Procedure. Attorneys must be specifically admitted to practice in the federal district courts to appear in Bankruptcy Court. Therefore, when an Association is faced with a bankruptcy BY a member, the Association should verify that its counsel is admitted to the federal district court and is familiar with the bankruptcy procedures.

For further information regarding the effect of a bankruptcy filing by a member, consult an association attorney that is familiar with the bankruptcy procedures.

By: Joseph R. Cianfrone, Esq.