Bankruptcy is a court case where a person attempts to have their debts wiped out (a Chapter 7 Bankruptcy) or attempts to have the court force their creditors to be paid under a payment plan (a Chapter 13 Bankruptcy).
The Petition date is the date that the person files the bankruptcy papers (the Petition) with the bankruptcy court.
The petition date is also the date that the Automatic Stay takes effect. The automatic stay is like an automatic court order that orders creditors to stop pursuit of the person who owes the debt as long as the automatic stay is in effect. Judges will impose sanctions against those who continue to pursue people in bankruptcy when the automatic stay is in effect.
What should a manager do when a bankruptcy notice is received?
First, immediately notify the association’s collection attorney and provide the attorney with copies of any bankruptcy documents received so that the association will temporarily stop collection efforts and will not be sanctioned for violating the automatic stay.
Modify the bookkeeping for the unit. Set up one account to keep track of Pre-petition accruals (fees etc. that accrued prior to the petition date). Only payments received from the Chapter 7 or Chapter 13 Trustee should be applied to the pre-petition accruals. Set up a second account to keep track of Post-petition accruals (fees etc. that accrue after the Petition date). Only payments received from the unit owner after the petition date should be applied to post-petition accruals.
A bankruptcy notice will typically be provided which will indicate the type of bankruptcy case filed and whether it appears that assets will be available for payment of pre-petition accruals. If the notice indicates that assets are available, a Bar Date should be indicated on the notice. The Bar Date is the deadline for the association to submit its Proof of Claim to the court so that the association may receive some of the assets available from the bankruptcy. In bankruptcy, the bar date deadline is very serious and failure to file a proof of claim on time will typically result in loss of the claim.
The proof of claim is typically prepared by the association’s attorney. The proof of claim specifies the amount of the pre-petition accruals and the property that secures the amount owed. Typically the association’s attorney also prepares and files a notice of appearance which advises the court that the association intends to participate in the case.
In a Chapter 13 case the association attorney may also file an objection to confirmation objecting to the plan that the unit owner has proposed for paying off the pre-petition accruals (usually over a five year period). If an objection is filed the attorney will have to appear at the Confirmation Hearing (A hearing before the Judge and/or Chapter 13 Trustee where the plan and the objections to the plan are reviewed). If the court and the Trustee find the plan satisfactory, the plan will be confirmed and will bind those included in it.
How can an Association proceed against a non-paying unit owner if a bankruptcy is filed?
Obtain Stay Relief by filing a stay relief motion with the bankruptcy court. The usual basis for this motion is that the unit owner has continued to fail to pay post-petition accruals or the bankruptcy was filed in bad faith. If this motion is granted, the association will be able to continue pursuit of the unit owner. However, if the unit owner dismisses his bankruptcy case and then files another one, a new automatic stay takes effect and the association’s collection efforts are stopped again. After serial filings, the association may apply for Prospective Stay Relief. If the association obtains a prospective stay relief order, the association may continue to pursue the unit owner even if a new bankruptcy is filed. Note that, even if stay relief is granted, if a plan is confirmed, the plan will bind the association.
Often, prospective stay relief is the ultimate goal because serial filings for the purpose of delay are common. Though hard cases generate attorney fees in obtaining prospective stay relief, associations should discuss this option with collection counsel because, if the association does nothing, non-paying unit owners will be happy to live for free and mortgage companies cannot be counted upon to aggressively obtain stay relief and finalize foreclosure. If the association obtains prospective stay relief, the association may foreclose and have the unit owner removed from the unit. This may not generate money for the association but it will help expedite turnover of the property to a new paying owner. Many associations rent units during the period from the association’s foreclosure sale to the bank’s foreclosure sale. Lastly, in a chapter 7, the case is typically closed quickly. Once closed, the stay is gone and, though personal liability is discharged, the lien on the unit survives and may be foreclosed. This is why pre-petition accruals should not be automatically written off, even in a chapter 7.