Bankruptcy & Homeowner’s Association Foreclosure
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.
Liens for Homeowner’s Association Dues in New York
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. 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 before the HOA lien can be foreclosed. Such a lien, once filed, 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.
HOA Liens in Chapter 13 Bankruptcy
If a homeowner in an HOA foreclosure wants to “save” the condo or townhouse a Chapter 13 bankruptcy is best designed to achieve this goal and provides the following options:
- Cure the arrears: The past due HOA payments can be repaid thru your Chapter 13 Plan over a three to five-year period;
- Strip off the HOA lien: If the condo is worth less than the amount owed on the first mortgage the Lien can be Stripped Off just like any other type of junior lien. (Example: The condo is worth #175,000.00, there is a $200,000.00 balance due on the first mortgage and a $10,000.00 HOA lien. As there is no equity in the condo for the HOA lien to “attach” to it can be Stripped Off, which puts the debtor / homeowner in a much better position since the HOA obligation is then treated like any other unsecured debt, often resulting in the HOA receiving from the Trustee only a fraction of the amount actually due);
- Bifurcate the HOA lien: Because the HOA lien is a statutory lien, and not a lien created solely by a written agreement, there are certain circumstances where it can be bifurcated into a secured claim, which would have to be paid in full thru the Plan, and an unsecured claim, which does not have to be paid in full. (Example: The condo is worth #175,000.00, there is a $171,000.00 balance due on the first mortgage and a $10,000.00 HOA lien. As there is $4,000.00 equity in the condo for the HOA lien to “attach’ to it can be bifurcated into a secured claim of $4,000.00 and an unsecured claim of $6,000.00);
A Chapter 13 debtor wishing to retain the condo or townhouse must commence paying all Common Charges that come due after the date of the bankruptcy filing.
HOA Liens in Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is not designed to “save” your condo or townhouse 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, but this is only helpful if you intend to “surrender”, or walk away from, the condo or townhouse. In a “surrender” scenario any subsequent HOA foreclosure will not matter because you were walking away from the property anyway. However, if you want to keep the condo or townhouse after your Chapter 7 discharge the only way to prevent the HOA from foreclosing is to catch up on the HOA fees owed at the time of the bankruptcy filing and stay current going forward;
- 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 “surrendering” the condo and no longer living there.
Dealing With HOA Charges After Bankruptcy
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:
- Pay the HOA dues and continue to live in the unit until it is sold at the foreclosure auction sale, hopefully putting away some money in the process. Think of the HOA dues as cheap rent;
- Rent out the condo until the unit is sold at foreclosure. Use the rental proceeds to pay the HOA dues and pocket the rest;
- Offer a Deed in Lieu of Foreclosure to the HOA. This will get you off the title quicker than just waiting for the foreclosure sale, and the HOA will be happy because they will rent out the unit until the mortgage holder forecloses.
- File your Chapter 7 as close to the foreclosure sale date as possible, thereby dramatically decreasing the amount of post-filing HOA dues that you will be on the hook for OR Don’t file the Chapter 7 until after the condo unit has been sold at auction sale.
For a Chapter 13 debtor wanting to “surrender”, or 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.
Contact our bankruptcy law office in Middletown, NY
For dedicated assistance with bankruptcy issues related to homeowner’s associations, contact the skilled attorneys at Hayward, Parker & O’Leary today. Their office is located in Middletown.