One of the primary reasons people file bankruptcy nowadays is some kind of issue with the real estate they own. And when a debtor falls behind on the mortgage, a homeowners association dues deficiency is not far behind.
A non-reaffirmed mortgage is dischargeable in bankruptcy, but are the association dues dischargeable in bankruptcy? The answer is yes and no.
Dues owed prior to the bankruptcy filing date (i.e., pre-petition dues) are dischargeable in bankruptcy. However, under 11 USC 523(a)(16), dues owed after the bankruptcy filing date (i.e., post-petition dues) are not.
That sounds simple enough, but it is much more complicated when you break it down. Lets start with examining the elements involved in the pre-petition association dues.
While the dues themselves are dischargeable, if the association has placed a statutory lien on the debtors property prior to the bankruptcy case being filed, the lien is not avoidable in bankruptcy. So if the debtor wishes to remain in the property long-term and then eventually sell it for a profit, while the bankruptcy wiped out the personal liability, the debtor still must eventually pay off the debt in order to satisfy the lien at closing. Note that if the debtor is underwater in the house and is not in a position to make a profit or refinance on the house, the debtor then has no incentive to pay off this lien and can let the eventual foreclosing party deal with it.
Even if the debtor has to deal with the lien eventually, the importance of eliminating the personal liability needs to be emphasized. A bankruptcy discharge order will eliminate the personal liability to pre-petition dues. By eliminating the personal liability, the homeowners association cannot penalize the debtor for running a balance. Depending on the homeowners association, a delinquent debtor can be denied lots of privileges, like using parking spots or the common areas, or even entering the facility. Additionally, if the association had already obtained a judgment, then the wiping out of the personal liability can prevent a garnishment of funds.
It is important to identify the line of demarcation here. The filing date is key. If the debtor continues to not pay dues after the filing date, the debtor is then delinquent on a post-petition debt. The bankruptcy protection of the automatic stay does not extend to post-petition dues, and the association could legally deny privileges to a defaulting post-petition debtor. And don’t underestimate that the homeowners association might be eager to do this, as the debtor has discharged an old balance to that same association.
As stated earlier, post-petition dues are not dischargeable in bankruptcy. Therefore, the question most debtors logically ask is, if I am surrendering my property in my bankruptcy and disclosed in my bankruptcy petitions Statement of Intention that I am surrendering, am I still liable for my dues as long as the title is still in my name? The unfortunate answer for debtors is yes, you are liable. This is true even if you are willing to deed back the property to the bank, and they are not willing to accept it.
So is there a solution for the debtor who wishes to vacate the property, but does not want to pay dues until the bank finally forecloses? Technically there is not one, since the debtor is legally liable; however, the association knows that if the debtor is no longer occupying the property, the penalty of loss of association privileges by virtue of missing post-petition payments is no longer a deterrent to the debtor. The association therefore might be willing to accept a small settlement with the debtor or not even attempt to collect at all. Furthermore, whatever balance accrues might be paid off by the bank as part of a foreclosure sale. Of course, the sooner the debtor gets the property out of his/her name, the smaller amount of money that is at issue.