A Chapter 13 bankruptcy filing provides several options to a homeowner wanting to “save” their condo or townhouse from an HOA foreclosure based upon unpaid Common Charges.
Under New York law the Board of Managers of a condominium or townhouse development is granted a statutory lien for unpaid Homeowner’s Association (“HOA”) dues and fees, generally referred to as Common Charges. This lien is superior to all other liens except: property and school taxes; a recorded first mortgage; a recorded “governmental-grant type” of second mortgage. When the condo is sold all unpaid common charges must be paid.
The lien for unpaid Common Charges is not self-executing. To be effective and enforceable a verified notice of lien, usually denominated as a Notice of Lien for Unpaid Common Charges, must be filed in the County Clerk’s Office where the property is located. Such a lien is effective for a period of six years after filing, can be foreclosed in the same manner as a mortgage and, unlike in the mortgage scenario, the Board of Managers can simultaneously sue the unit owner for a money judgment.
If a homeowner in an HOA foreclosure wants to “save” the condo or townhouse a Chapter 13 bankruptcy [Note to Martindale: please link the underlined phrase to the web page entitled Chapter 13 Bankruptcy and is best designed to achieve this goal and provides the following options:
A Chapter 13 debtor wishing to retain the condo must commence paying all Common Charges that come due after the date of the bankruptcy filing.
A Chapter 7 bankruptcy is not designed to “save” your house from an HOA foreclosure. Chapter 7 does not provide the homeowner with a platform to Strip Off (i.e., eliminate) the HOA lien or bifurcate the HOA lien. Once the Chapter 7 is filed the HOA is free to bring a motion in Bankruptcy Court to obtain relief from the Automatic Stay which, when granted, will allow the HOA to continue the foreclosure action. A Chapter 7 discharge: will eliminate your personal liability for HOA fees owed at the time of the bankruptcy filing; will not eliminate your obligation to pay HOA fees coming due after the Chapter 7 filing—this obligation will continue for as long as you own the condo, even if you are no longer living there.
The continuing liability to pay the HOA dues creates a significant complication for a Chapter 7 debtor who simply wants to “walk away” from a condo or townhouse. To lessen your exposure to this ongoing obligation one of the following avenues should be considered:
For a Chapter 13 debtor wanting to “walk away” from a condo the situation appears to be less daunting. The exception to discharge in Chapter 7 for post-filing HOA fees does not apply in Chapter 13, although the case law analyzing this scenario is far from a beacon of clarity.