A wave of unit owner bankruptcies is coming. Community associations must be prepared | Opinion
Even with the massive COVID-19 economic fallout, bankruptcy filings in 2020 so far trail those from last year, thanks in large part to the federal stimulus package and state moratoriums on foreclosures and evictions. The additional $600 per week in supplemental unemployment assistance, on top of the national average state unemployment benefit of $340/week ($275 per week maximum for up to 12 weeks in Florida), meant that many individuals who lost their jobs were suddenly receiving more money than when they were working.
This supplemental federal benefit expired in July and was replaced by an allocation from the Federal Emergency Management Agency for $300 or $400 per week, depending on states’ participation and contributions, which was paid retroactively from August 1 for up to six weeks. With no more federal aid apparently forthcoming, economists predict consumer bankruptcy filings are bound to rise.
For the more than 50,000 Florida community associations, the most of any state, now is the time to brace for the coming wave of bankruptcy filings by those who lost their jobs and businesses due to the pandemic. While bankruptcy used to be considered an endgame move that would practically quash associations’ abilities to collect on significant sums in unpaid fees, now there are several strategies that have proven to be effective for associations to collect from owners in bankruptcy and the future buyers of their units.
A homeowner in a community association typically files either a Chapter 7 or Chapter 13 bankruptcy petition. A Chapter 7 bankruptcy involves the complete liquidation of a debtor’s non-exempt assets in exchange for a discharge of their remaining debt. Individuals can wipe out many types of unsecured debt, and they can surrender possession of a secured creditor’s collateral such as real estate and vehicles to discharge those debts. If a debtor elects to retain their real property, then the secured obligation survives the bankruptcy.
Chapter 7 debtors who retain their residence remain obligated to pay the association assessments that come due after the bankruptcy filing, but those who timely surrender their property will receive a full discharge of all monetary obligations to the association.
A Chapter 13 bankruptcy is a personal repayment program designed to allow a debtor to save their home from foreclosure, and it does not require debtors to hand over any property to creditors. Instead, they must use their income to pay some or all of what is owed over a period of three to five years, which can now be extended to 84 months with court approval due to the pandemic. The debtor must provide a detailed repayment plan that is subject to objections by associations and other creditors, and it must ultimately be approved by the bankruptcy court.
Associations, in turn, must file a proof of claim or otherwise object to any inaccuracies in these repayment plans, or they may be bound by the incorrect repayment figures if the court confirms the plan.
Additionally, unit owners in Chapter 13 bankruptcy can wipe away pre-bankruptcy association liens by proving to the court that the value of their unit is less than the amount due on their first mortgage. They can use the “lien stripping” provisions of the bankruptcy code to completely nullify an association’s lien claim for outstanding assessments, late charges, interest, attorneys’ fees and costs which were incurred prior to their bankruptcy filing.
Notably, associations have the right to challenge these actions and the unit valuations, but they must act in a timely manner to meet the deadlines imposed by the bankruptcy court. If the property is the owner’s homestead, an association can overcome a lien strip action by convincing the court that the unit maintains even just a single dollar of equity, thereby requiring the owner to pay all of their past debt to the association over the life of the bankruptcy plan. Such an all-or-nothing scenario can be very risky for debtors, who may decide it is in their best interest to resolve the matter by settling with the association to repay a portion of their arrears through the bankruptcy plan.
It is also important to note that based on Florida law and the decisions of our local bankruptcy judges in the Southern District of Florida, for owners who successfully achieve a lien strip against an association in a Chapter 13 case, complete their repayment plan, obtain a discharge and subsequently sell their unit, the new buyer is liable for the arrears that were avoided in the bankruptcy case. In fact, associations may eventually collect the very debt that was avoided in a bankruptcy proceeding, but the payment will come from the subsequent unit owner(s).
While bankruptcy is designed to help debtors regain their financial footing and earn a fresh start, federal bankruptcy courts have no desire to run roughshod over the rights of secured creditors. This is often especially true for associations, as judges are sympathetic to the fact that associations confer a benefit upon and protect the values of the properties some debtors are hoping to retain through bankruptcy. By turning to the guidance of highly qualified and experienced bankruptcy creditors’ rights counsel, associations can effectively collect from unit owners in bankruptcy as well as the eventual buyers of their residences.
Jeffrey S. Berlowitz is a shareholder with the law firm of Siegfried Rivera who is based at the firm’s Coral Gables office. www.SiegfriedRivera.com, 305-442-3334.
