Homeowners may find themselves in such dire financial situations that filing for bankruptcy is their best solution. While this process is often difficult for homeowners, it may also present legal complications for homeowners’ associations (HOAs).
Once a homeowner files for bankruptcy, the HOA must cease any legal action or collection efforts against that homeowner. Contact your HOA’s attorney immediately and explain the situation. Our Arizona association governance attorneys will help you protect your legal claims against the homeowner and work to make sure you get paid. Even if the homeowner’s debts to the HOA are discharged, liens on the homeowner’s property may remain, and there may still be ways to enforce payment.
Request a confidential legal review of your situation from our Arizona association governance lawyers by calling Halk, Oetinger, and Brown at (602) 759-9205.
HOA Collection Efforts After a Homeowner Files for Bankruptcy in Arizona
If a homeowner owes money to their HOA, the HOA may take legal efforts to collect the debt. Whether this constitutes informal action or highly formal legal action, all action must stop.
The Automatic Stay
When a person files for bankruptcy, the bankruptcy court will impose something called an “automatic stay.” This is a court order that prohibits creditors from initiating new legal action against the debtor to collect unpaid debts. It also requires that any pending legal action be halted immediately.
Your HOA must stop all collection efforts. This includes less formal actions, like demand letters, and more sophisticated actions, like lawsuits. If you attempt to collect the debt, the homeowner may inform the court, and your HOA may face consequences.
Pending Lawsuits
Perhaps your HOA has already filed a lawsuit against the homeowner. In that case, the lawsuit must stop immediately. The defendant (i.e., the homeowner who filed for bankruptcy) should inform the court that they have filed for bankruptcy, and if the case is about debt collection, the case must halt.
Foreclosure Proceedings
Foreclosure proceedings must stop immediately once a homeowner files for bankruptcy. In fact, filing for bankruptcy is a legal method used by many homeowners facing foreclosure to give themselves more time to try to save their home.
When HOAs place liens on a homeowner’s property, they may be able to initiate foreclosure, depending on the circumstances and the laws of the state where the HOA is located.
Do HOAs Have Secured Claims in Arizona Bankruptcy Cases?
Debts are treated differently in bankruptcy proceedings depending on whether they are secured or unsecured.
Secured Debts for HOAs
A secured debt is somehow legally connected to property, often real property. For example, mortgages are a form of secured debt because the debt is connected to real property. If the person who bought the property fails to pay the mortgage, the creditor may legally seize the property.
Unsecured Debts for HOAs
Unsecured debts are still legally enforceable, but they are not connected to property. If a debtor fails to pay, creditors have more limited collection enforcement options, as there is no property to leverage.
Priority of Creditors
When a homeowner files for Chapter 7 bankruptcy, their property may be liquidated, and the proceeds may be used to pay various creditors. Creditors with secured debts are paid first, especially if the homeowner plans to keep the property attached to their secured debts.
If an HOA’s debts are secured, they are more likely to get paid at the end of the bankruptcy process, depending on which bankruptcy chapter the homeowner files under. Secured debts for HOAs often involve liens placed on homeowners’ properties.
Do Arizona HOAs Have Creditor Rights When a Homeowner Files Bankruptcy?
Creditors are not always paid when bankruptcy proceedings are over, but that does not mean that they are always left high and dry when a homeowner files for bankruptcy.
What is the HOA’s Creditor Status?
The HOA’s status and priority as a creditor largely depend on whether the debts they claim are secured or unsecured. As mentioned above, secured debts are connected to property, while unsecured debts are not.
Creditors, including HOAs, who hold secured debts may be prioritized over other creditors when a homeowner files for bankruptcy in Arizona. If your HOA has a legal claim to debts owed by a homeowner who has recently filed for bankruptcy, our Arizona association governance lawyers should help determine whether these debts are secured.
Protecting the HOA’s Creditor Status
If a homeowner owes the HOA a significant amount of money, the HOA should consider securing that debt with property. In Arizona, when HOA assessments are unpaid, a lien may be automatically placed on the homeowner’s property, according to state law and the HOA’s covenants, conditions, and restrictions (CC&Rs).
If the debt is not secured by property, it may be paid only after other creditors with secured claims are paid. In many cases, there is no money left to pay debts once priority creditors are paid.
Filing a Proof of Claim
A “proof of claim” is a formal notice asserting a creditor’s right to be paid during the bankruptcy process. An HOA may file a proof of claim with the court clerk’s office at the relevant bankruptcy court.
While a proof of claim does not necessarily guarantee payment, it puts the homeowner, the bankruptcy trustee, and any other interested parties on notice that the HOA wants payment.
How Chapter 7 Bankruptcy Affects an HOA
A homeowner may file for bankruptcy under various federal bankruptcy chapters. One of the most common is Chapter 7, which involves liquidating property and using the proceeds to pay creditors, including HOAs.
Liquidation Process
Under Chapter 7 bankruptcy, the petitioner’s property may be seized by the bankruptcy trustee, possibly including the homeowner’s property within the HOA’s community. The trustee may sell any seized property and use the proceeds to pay creditors.
If there is not enough money from the liquidation process to pay all creditors, some debts may be discharged, meaning the petitioner is no longer legally obligated to pay, and the creditor cannot take legal action to collect the debt.
Payment of Liquidation Proceeds
When someone files for bankruptcy, there are often multiple creditors seeking payment. Unfortunately, there is often not enough money from the liquidation for everyone, and the bankruptcy trustee must decide who gets paid first.
Those with secured debts usually get paid first. If an HOA has a lien on a bankruptcy petitioner’s property and that property is liquidated, the HOA is likely to be one of the first creditors paid.
Discharge of Debts
If the homeowner’s debts to the HOA are unsecured or otherwise not prioritized by the bankruptcy trustee, they may be paid later than other creditors. If the proceeds from the liquidation process run out, the HOA may be left empty-handed.
Even so, liens are not always wiped out simply because the debt owed to the HOA is discharged. If the homeowner retains their home through the bankruptcy process, the lien may remain, and the HOA could potentially seize the property and initiate foreclosure.
How Chapter 13 Bankruptcy Affects an HOA
Chapter 13 bankruptcy, another very popular bankruptcy option, does not involve liquidating assets but rather reorganizing finances and adhering to an aggressive yet feasible payment plan approved by the bankruptcy court.
Reorganization of Debts and Payment Plans
HOAs often stand a better chance of recovering money owed when a homeowner files for Chapter 13 bankruptcy, but payment plans often take about 3 to 5 years, so recovery may not be very quick.
Your HOA’s attorney should help assert your HOA’s claims and make sure they are included in the homeowner’s Chapter 13 payment plan.
Payment of Secured Debts Through Payment Plans
When a homeowner makes payments according to a Chapter 13 payment plan, HOA liens on their property may remain in place until the debt is paid according to the payment plan.
While it may take time and patience, an HOA may eventually recover the money owed by the homeowner. If the homeowner falls behind on payments, the HOA may enforce the lien, seize the property, and initiate foreclosure to obtain payment.
Paying Unsecured HOA Fines and Fees
Unsecured claims may still be paid through a Chapter 13 payment plan, but they are more likely to be discharged after only a portion of the total amount is paid.
If your HOA’s claims involve unsecured debts from the homeowner, they might not be fully paid even under a Chapter 13 payment plan.
FAQs About HOA Homeowners Filing for Bankruptcy in Arizona
What is an Automatic Stay in Arizona Bankruptcy Cases?
An automatic stay is a court order that goes into effect almost immediately after a petitioner files for bankruptcy. The order prohibits creditors from taking legal action against the petition to recover debts while the bankruptcy case proceeds. Any legal action against the petitioner that was pending when the automatic stay took effect must halt.
Can an HOA Sue a Homeowner Who Has Filed for Bankruptcy?
An HOA may not sue a homeowner who has filed for bankruptcy while the automatic stay is in effect. If the HOA filed a lawsuit before the automatic stay was imposed, that lawsuit must be put on hold while the bankruptcy case moves forward.
How Do HOAs Place Liens on Properties?
HOA liens in Arizona are often automatic. Once a homeowner is past due with HOA assessments, a lien may be placed on the homeowner’s property automatically. This is spelled out under Arizona law and is likely also explained in the HOA’s CC&Rs and bylaws.
Can an HOA Recover Debts if a Homeowner Files for Bankruptcy?
Yes, but the recovery of all debts might not be guaranteed. When debts are secured, meaning they are connected to property, the creditor may be prioritized and paid before other creditors. However, if debts are unsecured, creditors may be paid later, and, if the money runs out, creditors last in line might not be paid.
How Does Chapter 7 Bankruptcy Affect an HOA’s Claims Against a Homeowner?
Under Chapter 7, a bankruptcy petitioner’s property, possibly including their home, is seized by a bankruptcy trustee and liquidated. Proceeds from the liquidation process are used to pay creditors. Certain debts that cannot be paid may be discharged, though not all debts are eligible.
Can an HOA Recover Money Owed if a Homeowner Files for Chapter 13 Bankruptcy?
Yes. Under Chapter 13, a bankruptcy petitioner must reorganize their debts and finances through an aggressive yet feasible payment plan, which the court must approve. The petitioner may be required to pay the HOA according to the terms of the plan. If the petitioner fails to pay according to the plan, an HOA may still act on liens placed on the petitioner’s property.
How Can an HOA Protect Its Claims When a Homeowner Files for Bankruptcy?
An HOA may protect its claims when a homeowner files for bankruptcy in several ways.
First, the HOA may secure its claims by attaching debts to property. Liens may be automatically placed on a homeowner’s property when they fail to pay HOA assessments.
Second, an HOA may protect claims by filing a proof of claim with the bankruptcy court. This does not guarantee payment of debts, but helps to assert the HOA’s claims as a creditor.
Can Debts to an HOA Be Discharged if an Arizona Homeowner Files for Bankruptcy?
Possibly. If a homeowner plans to keep their home at the end of the bankruptcy process, they are still responsible for paying past-due HOA fees and assessments. If the house is foreclosed before the homeowner files for bankruptcy, HOA debts may be discharged.
Contact Our Arizona Association Governance Lawyers if an HOA Homeowner Files for Bankruptcy
Request a confidential legal review of your situation from our Arizona association governance lawyers by calling Halk, Oetinger, and Brown at (602) 759-9205.
