Prior to the 1994 Amendments to the Bankruptcy Act, various courts had interpreted the bankruptcy code differently in connection with so-called 'post-petition' association assessments. The current provisions make most homeowners pay post-petition assessments. Unfortunately, the 1994 Amendments provided that if debtor is not either: (1) living in the unit, or (2) receiving rent from the unit, post-petition assessments will also be discharged. Accordingly, pre-petition assessments and post-petition assessments incurred after the debtor leaves the unit or ceases receiving rent from the unit can be discharged, so that no post-petition assessments can be collected personally from a debtor for periods when the unit is vacant, although you can foreclose the assessment lien. Recent proposed amendments to the Bankruptcy Act would require the payment of post-petition assessments as long as the debtor remains the owner of the unit or lot, but these changes have not yet been adopted by Congress.

In Chapter 7 cases, until the Debtor's discharge is entered, usually four to six months after the filing date, no action should be taken against the debtor personally or to foreclose the lien of assessment. If the Debtor has continued to live in or rent the unit in question, the association can take action against the debtor personally to collect delinquent post-petition assessments.

Pre-petition and post-petition assessments remain a lien against the property after a discharge (even though the Debtor may no longer have any personal liability for them) and must be paid upon a sole or other transfer of the property, unless the transfer is as a result of a foreclosure action by a first mortgage lender.

In a Chapter 13 case, the Debtor is allowed from 36 to 60 months to apply all available disposable income towards the Debtor's pre-petition delinquencies. If the Debtor's available income for that period of time is sufficient to pay all secured pre-petition arrears, with at least as much available for unsecured claims as they would have received in a Chapter 7, a Chapter 13 plan will usually be confirmed.

In almost all cases, delinquent assessments will be considered 'secured debt' for purposes of a Chapter 13 plan. This means that all pre-petition delinquencies must be paid over the 36 to 60 month period of the Chapter 13 plan. In addition, all post-petition assessments must be kept current throughout the period of the plan.

As in a Chapter 7 case, the association should file a proof of claim immediately upon learning of the filing of the Chapter 13 petition. In addition, the association should have an attorney familiar with bankruptcy procedures appear in the bankruptcy case to receive all notices. The attorney should review, and object if necessary, to the Chapter 13 plan proposed by the Debtor, to insure that the association's pre-petition and post-petition claims are treated properly in the Chapter 13 plan.

In spite of the complexity, the filing of a bankruptcy petition by a delinquent homeowner does not necessarily mean that the association must simply write off delinquent assessments. In many cases, following appropriate procedures will result in at least a partial recovery, even though it may be delayed, particularly if past due assessments are paid as part of a five-year Chapter 13 plan.

This update is only a summary of the new legislation, and is not intended as legal advice for a specific set of circumstances. For further information contact Don Dyekman, Dan Curtis or Alan Meda at the above address or phone.