Protection from Your Homeowners’ Association

Law Office of Robert L. Firth Sept. 30, 2019

Bankruptcy gives you protection from your homeowners’ association. Chapter 7 may be enough, but Chapter 13 buys much more time.

Filing bankruptcy gives you limited, but potentially very useful protection from your homeowners’ association liens and debts. A Chapter 13 “adjustment of debts” filing could especially help.

Your Homeowners’ Association Is a Particularly Dangerous Creditor

Once you fall behind on homeowners’ dues and or assessments, your association gains tremendous power over you and your home.

Unpaid obligations to your homeowner’s association (HOA) immediately create a lien against your home for the amount of the debt. As soon as the debt increases—every month, usually—the lien increases. This is true whether or not you are in bankruptcy. Assuming you want to keep the home, you will have to pay the debt one way or the other.

Also, about 20 states’ laws give HOA liens “super-priority” status over other liens that are attached to the property. This would include priority over even your first mortgage, which could create huge problems for you. As just one example, if your HOA forecloses on its lien that would eliminate the first mortgage lien. At least potentially, none of the value of the home would go towards paying down the mortgage debt. You could owe the full balance of that mortgage debt in spite of no longer owing the property!

Also, you cannot discharge (legally write off) the debt for any HOA dues and assessments that come due after you file bankruptcy. This is true “for as long as [your or your bankruptcy trustee] has a legal, equitable, or possessory ownership interest” in the home. Subsection 523(a)(16) of the U.S. Bankruptcy Code. This means that if you surrender the home and walk away from it but neither the HOA nor your mortgage holder foreclose your interest in the property for a while, you continue to be on the hook for the monthly accruing due, plus any new assessments, and likely other HOA costs like foreclosure and attorney fees.

As we said, your HOAs can be a dangerous creditor. You need all the protection you can get.

What Chapter 7 Can Do For You

Assume you want to keep your home and are not terribly far behind on the HOA dues and/or assessments. Filing a Chapter 7 “straight bankruptcy” case may give you the limited help you need.

In most Chapter 7 cases all or most of your unsecured debts (those without any liens) get permanently discharged. This should significantly help your cash flow. Most of those debts you don’t have to pay as of the day you file your Chapter 7 case. Talk with your bankruptcy lawyer about whether you would have the cash flow to catch up on and maintain your HOA payments once you file bankruptcy. Your lawyer may want to contact the HOA to work out a payment plan in advance.

Remember, once you decide to keep the home you need to be confident that you can afford to do so. That’s because, as explained above, your Chapter 7 case will not discharge any HOA obligations that come due after filing. The last thing you want is new HOA debts accruing on a home you aren’t keeping after all. Decide to keep the home only if you know you can get current and keep current with the HOA.

The Much Greater Protection under Chapter 13

Filing a Chapter 13 “adjustment of debts” gives you much more protection against HOA debts and liens. It’s often the better tool if you’re substantially behind with the HOA and need lots more time to catch up. It may well be the only way to keep your home if you’re behind on both the mortgage(s) and HOA debts.

Chapter 13 involves you and your bankruptcy lawyer putting together a formal 3-to-5-year payment plan. That plan would show how you’d catch up with the HOA within that 3-to-5-year time span.

Same thing with any mortgage arrearage and other special debts. Most ordinary unsecured debts you’d only pay if and to the extent you had money to spare after these more important debts.

From the moment you file your Chapter 13 case and then throughout the payment time span, the HOA would usually not be able to take action against you or your home. It can’t foreclose its lien, or cause other mischief, as long as you’re paying the plan as agreed. Then at the end of your payment plan you’d be current with the HOA.

You’d also be current on or have paid off other important debts (like your mortgage, certain income taxes, and such). To the extent you haven’t fully paid other, ordinary and unsecured debts their remaining balances would get discharged. You should be debt free (except for long-term debt like your home mortgage). And you would have taken care of the dangerous HOA while protecting and keeping your home. Mission accomplished.