When homeowners fall behind on mortgage payments and Homeowners Association (HOA) monthly fees, they may be in for a disappointing surprise if they file for bankruptcy. Relief from their past due HOA monthly fees and assessments may not be possible in bankruptcy.
Foreclosure Fallout: When The Lender Sells the Property
Consider the complicated case of Cruz v. Valerio Townhomes Association- a California case pitting an HOA against a homeowner whom they claim made just eight monthly payments in eight years.
Most HOAs have a legal right to put a lien on a property in that is in arrears; the details are found in the HOA’s Covenants, Conditions and Restrictions (CC&Rs). Liens are a last resort by the HOA to collect money owed after negotiations and collections s fail.
When Cruz defaulted on her mortgage to her unit, the trustee sold her townhouse to satisfy the terms of the loan. Purchased in 2005, by the time the townhome sold in 2017, it had appreciated in value, resulting in surplus funds of over $1150,000 after the foreclosure sale.
The HOA was initially awarded about $52,000, but then things got complicated. Who is entitled to the surplus?
Liens Against a Foreclosed Property – Who Gets Paid?
Prior to the trustee foreclosure sale in 2017, the HOA had tried to foreclose on the lien in 2015. However, the homeowner filed a Chapter 13 bankruptcy petition a few days before the action to prevent the sale. The resulting delay in any foreclosure actions resulted in additional legal fees for both parties as attorneys argued the validity and timeliness of the lien, as well as many nuances of California law regarding lien processes, foreclosure procedure and bankruptcy rules.
Results and Lessons – HOAs May Enforce Liens for Unpaid Fees
Valerio Townhomes Association prevailed. The court of appeal upheld the trial court’s award of about $95,000 to the HOA. This money was awarded to the HOA as a result of the HOA having to litigate about Cruz’s bankruptcy claims and the HOA liens
Lessons and guidelines to note:
– HOA liens can be significant disruptions during bankruptcy actions.- Once bankruptcy is filed, an automatic stay goes into effect, stopping further assessments to the debtor.
– Outstanding HOA fees can be included in a Chapter 13 repayment plan.
– HOA members who default are liable for debt incurred after the date of the bankruptcy filing.
– HOA liens filed prior to a bankruptcy are secured debts (as are overdue property taxes). A secured debt is one that is tied to the homeowner’s property and in the event of a default, the lender or HOA may move to sell the homeowner’s unit. They may have priority over other debts that are not tied to the homeowner’s property, i.e., water bills.
– HOAs can benefit from acting swiftly and carefully to enforce the CC&RS they depend on to secure their financial health.
– Homeowners can benefit from familiarity with their contractual obligations to their HOA which is usually detailed in the CC&Rs.