Condominiums, Homeowners’ Associations and Bankruptcy: The Lifecycle of a Chapter 13 Bankruptcy
In Part 4 of this series, I discussed how the Automatic Stay stops collection efforts against Unit Owners. In this entry, I want to go through a typical timeline for a Chapter 13 Bankruptcy case — mostly from the Association’s perspective. I do not intend this to be an exact breakdown of the Bankruptcy Court’s filing deadlines and procedures. Rather, this is more of a general, “what to expect” timeline.
Before I do so, remember that when a Unit Owner files for Bankruptcy, they usually have debts that they cannot pay without that help. In our situation, it usually means that they are far behind on their mortgage and/or assessments. Very often, a Unit Owner files for Bankruptcy to stop a foreclosure by the Bank or the Association. When a Unit Owner files for Bankruptcy, they often owe thousands or tens of thousands of dollars to the Association and hundreds of thousands of dollars to the mortgage company.
This is a reason to start collections while account balances are small. When they are modest and simple, Unit Owners can usually find a way to pay them off over time. But when they get to be multiple thousands of dollars, the options are limited. But that is another article.
Initial Filing of a Chapter 13 Bankruptcy
All Bankruptcy cases start with filing a Bankruptcy Petition. In a Chapter 13, the Unit Owner needs to file a lot of paperwork along with the Petition. There are three major categories of forms that get filed at the beginning. They are:
- Forms that show the Unit Owner’s income and expenses so that the Bankruptcy Court can determine the “Disposable Income”
- Forms that show the Creditors, the Debt owed, and whether the debts are secured or unsecured
- A Repayment Plan that shows how the Debtors will be repaid
All these items are supposed to be provided to the Bankruptcy Court within 14 days of the Petition. Though, in my experience, the Courts will give extensions for 30 or even 60 days.
Running Time Tracker: It could take 60 days from the Petition until the Unit Owner files a Plan for us to look at.
After the Petition and Plan are filed, the Bankruptcy Trustee will call for a Meeting of Creditors. This happens about 30-45 days after the Petition and is optional for the Association to attend. In my experience, the only value of attending a Meeting of Creditors is if there is a big discrepancy over the Unit Owner’s disposable income. I rarely spend time at the Meeting of Creditors.
Confirmation of the Plan
No more than 45 days after the Meeting of Creditors, the Bankruptcy Court has a Confirmation Hearing. The Confirmation Hearing is where the Bankruptcy Judge decides whether to approve the Bankruptcy Plan. This is where any Creditors, including the Association, can argue that the Plan should not be approved or confirmed.
This is the first point in the process where an Association might become actively involved. Sometimes a Unit Owner does not list the Association’s debt at all. Or they do not list it as a secured debt. Or the repayment plan does not pay off all the past due (but Pre-Petition) assessments over the life of the Plan. If the Plan has one of these problems, I will object to the Confirmation of the Plan. That means that I show up at the Confirmation Hearing and ask the Bankruptcy Judge to reject it.
In reality, the Bankruptcy Judge does not reject a Plan at the first Confirmation Hearing. Usually, if there is a problem with it, the Bankruptcy Judge will give the Unit Owner another 30 days to submit a new Plan. This can happen more than once.
Running Time Tracker: We could be four to six months from when the Unit Owner first filed for Bankruptcy before the Bankruptcy Court approves their repayment Plan.
Payments from the Bankruptcy Trustee
After the judge does confirm the Plan, the Unit Owner makes payments to the Bankruptcy Trustee. The Bankruptcy Trustee divides the payments out among the Creditors as provided for in the Plan. As the Trustee takes their payments first, the initial payments to the Association might be small. It might even take a few months for the Association to get its full monthly payment from the Trustee.
These monthly payments then go on for the life of the Plan, which could be as long as five years.
Remember, the Bankruptcy Plan only pays Pre-Petition Debt. That is, the Plan only pays back the past due assessments as of the Petition Date. Of course, the Unit Owner also needs to pay their regular Post-Petition assessments. These payments are made to the Association outside of the Plan. That is, they come directly from the Unit Owner instead of the Trustee.
Payments from the Unit Owner
Sometimes – too often – the Unit Owner does not make the Post-Petition payments outside of the Plan. When that happens, we need to go through a process. First, I need to contact the Unit Owner’s Bankruptcy Attorney. I remind them that the Debtors need to pay ongoing Post-Petition Assessments and ask them to please catch up. Usually, we give them two weeks to start making payments.
If the Unit Owners do not catch up, then the Association needs to go to the Bankruptcy Court. Remember, the Automatic Stay means that the Association cannot take any adverse collection action against the Unit Owner without Bankruptcy Court approval. The Automatic Stay lasts for the duration of the Plan, which can last for five years. So if the Association wants to collect the ongoing, Post-Petition assessments, we need permission from the Bankruptcy Judge.
The most common way to go after Post-Petition assessments is to ask for “Relief from the Automatic Stay.” This is done by filing a “Motion for Relief” (“MFR”) in the Bankruptcy Court. If the Bankruptcy Judge grants the Motion, then the Association can pursue regular collections against the Unit.
Process-wise, the Association files a MFR, and the Unit Owner can file an answer. There will be a hearing on the MFR in about 30 days. Usually the Motion for Relief produces one of three possible outcomes. They are:
- The Unit Owner agrees to a payment plan to catch up on Post-Petition assessments outside of the Plan. This is a normal payment plan that could stretch out over a few months to a year. Remember, this is only for Post-Petition assessments. So the Unit Owner will usually only owe 3-6 months at this time.
- The Unit Owner does not respond to the MFR, and the Bankruptcy Judge grants the motion. This means that the Association can go through collections of Post-Petition assessments outside of the Bankruptcy process.
- Sometimes the Unit Owner wants to pay off the Post-Petition assessments that are due at that time through the Bankruptcy Plan. So the Bankruptcy Judge will allow the Unit Owner to amend their Plan and add to the amount of assessments that are paid through the Plan.
Running Time Tracker: We could be six to eight months from when the Unit Owner first filed for Bankruptcy before they start paying the Post-Petition assessments outside of the Plan.
I don’t want to paint too bleak of a picture of Chapter 13 bankruptcies. Sometimes a Unit Owner makes their Post-Petition payments starting day one. In my experience, that happens about half of the time. The other half, the Association has to do anything from a little push to actively pursuing relief through the Bankruptcy Court.
But remember: there are always things that the Association can do to make sure they get paid. The key is to not delay.
If the Plan is not correct, the Association needs to take action to stop the confirmation of the Plan. If the Unit Owner does not pay Post-Petition assessments, the Association must act quickly. We check in on Unit Owners in Chapter 13 Bankruptcy every few months. If the Association pays attention and remains diligent, it can collect all the Pre- and Post-Petition assessments that are due.
In the next part of the series, I will talk more about what happens when a Creditor – including the Association – gets Relief from the Automatic Stay.