Homeowners may owe various fees, fines, and assessments to their homeowners’ associations (HOAs). If these fees go unpaid for too long or hit a certain monetary threshold, the HOA may place a lien on the homeowner’s property. If the homeowner later files for bankruptcy, the HOA’s lien may become a significant issue.
HOA liens are crucial in cases where homeowners file for bankruptcy because the lien helps secure the HOA’s legal claims for the debt. When a debt is secured, it is often legally tied to some form of property. If the debtor cannot pay, the creditor may have the right to seize the property. In bankruptcy proceedings, debts may be discharged by the court, and debtors may no longer be liable for payment. However, liens are not so easily erased, and HOAs should seek legal help to protect their legal and financial interests.
Request a private legal assessment by calling our association governance lawyers with Halk, Oetinger, and Brown at (602) 759-9205.
Why HOA Liens Matter When a Homeowner Files Bankruptcy
Liens are common when dealing with HOAs, especially when homeowners fall behind on HOA assessments and other fees. If a homeowner files for bankruptcy, the liens do not just go away and may affect whether an HOA can recover debts from the homeowner.
Protecting HOA Claims
A lien may help protect an HOA’s legal interests if a homeowner files for bankruptcy. Some creditors might not get paid what they are owed when a person files for bankruptcy, but a lien might help move the HOA closer to the top of the list.
As described in more detail below, a lien is a form of secured debt. Creditors who hold secured debts are prioritized in Chapter 7 bankruptcy cases and are usually paid first. Creditors who hold unsecured debts may be paid later, but only if there is enough money left, which there might not be.
Creating a Paper Trail
Liens also help create paper trails regarding debts owed to HOAs. One of the first things that happens in a Chapter 7 case is that the bankruptcy trustee will seize property and assets from the petitioner, often including their home. They will quickly learn there is a lien on the house if they were not informed already.
Liens are not easily wiped out by bankruptcy, even if the underlying debt is discharged. Having a lien in place when someone files for bankruptcy makes it harder for the petitioner to avoid paying the debt.
Secured vs. Unsecured HOA Claims, Explained Simply
A major distinction among debts during the bankruptcy process is whether debts are secured or unsecured. This distinction may determine which creditors are paid first and whether some will even be paid at all.
What Is a Secured HOA Claim?
A secured claim is tied to property. People often use property as collateral, and creditors may seize the property if the debt is not paid. A common example of a secured debt is a mortgage. The mortgage is almost always tied to a person’s house. If the homeowner fails to pay the mortgage, the creditor, usually a bank, may seize the home and initiate foreclosure.
HOAs may have secured debts in the form of liens. In some states, a lien may automatically be placed on a homeowner’s property if they fail to pay HOA assessments on time. The only way to remove the lien is to pay the debt. If the homeowner does not pay, our association governance attorneys can help the HOA act on the lien and seize the property.
What Is an Unsecured HOA Claim?
Unsecured claims involve debts that are not tied to property. If the debt goes unpaid, there is no property or collateral for the creditor to seize. As such, unsecured debts tend to be riskier for creditors, especially if the debt is quite large.
Why the Difference Matters
This distinction between secured and unsecured debt is crucial for HOAs when a homeowner files for bankruptcy, as it may relate to HOA liens. When homeowners fail to pay HOA assessments, the HOA may place a lien on the homeowner’s property within the community. How this happens may be determined by state laws and HOA covenants, conditions, and restrictions (CC&Rs).
Does an HOA Lien Survive Bankruptcy?
A lien is not a debt but a creditor’s right to property if a debt is not paid. As such, bankruptcy generally does not remove liens from property, and an HOA may still have a lien on a homeowner’s property after bankruptcy.
Petitioner’s Obligation to Pay the Lien
When a debt is discharged, the bankruptcy petitioner’s legal obligation to pay it may be eliminated. Put another way, the petitioner does not have to pay, and the creditor cannot take action to collect the debt.
Remember, debts are discharged, but liens are not. A lien is not the debt itself but a creditor’s right to the property connected to the debt. As such, many HOA liens survive the bankruptcy process.
How Liens May Remain on the Property
Even if debt related to a lien is discharged, the lien may remain on the property. In that case, the lien would continue to cloud the property’s title, making it difficult to sell.
An HOA or another creditor with a lien on a property may use the lien to seize the property even if the debt is discharged through bankruptcy. The HOA could then foreclose on the property and collect the money owed.
Which HOA Charges Are Usually Secured?
Again, a secured debt is attached to property. In cases involving HOAs, secured debts often take the form of a lien on the homeowner’s property.
Unpaid Assessments
HOA assessments are regular fees that all homeowners within an HOA are expected to pay. They may be charged monthly or quarterly, and they are used to maintain common areas and amenities, such as community pools and parks.
When amenities are unpaid, they may result in a lien. In some states, liens may happen automatically, and paying the fees is the quickest way to remove them.
Collection Costs and Attorney Fees
When debts are past due, the HOA board may need to take legal action to recover the debt. This action may be relatively minor, like sending a demand letter, or a major legal action like a lawsuit. If the HOA is successful, it may claim reasonable legal costs and attorneys’ fees from homeowners. If these go unpaid, they may become secured debts.
Late Fees and Interest
When fees are paid late, HOAs may charge late fees or interest in accordance with the association’s covenants, conditions, and restrictions (CC&Rs) and applicable state laws. Again, if these costs are not paid, they may lead to secured debts.
Which HOA Charges May Be Unsecured?
Not all charges imposed by an HOA may result in secured debts, such as liens. Below are some common examples of unsecured debts that may be more difficult to recover if a homeowner files for bankruptcy.
Fines and Violation Penalties
When a homeowner violates the terms of the community’s CC&Rs, they may be fined. Unpaid fines are normally unsecured debts. These fines are unsecured because they are penalties for violations rather than assessments tied to property maintenance and upkeep, so there is usually no collateral backing.
Administrative Fees
HOAs may charge various administrative fees related to handling non-payment issues or general community administration issues. Again, these fees are normally not backed by any collateral and are unsecured.
Poorly Documented Charges
Even if certain charges could be secured with property, the HOA must properly document them. If charges are poorly documented or not backed by sufficient evidence, it may be legally impossible to secure them with any property. Not only that, but homeowners may more easily dispute poorly documented charges, and recovery may be very difficult.
Chapter 7 Bankruptcy and HOA Liens
Chapter 7 bankruptcy is one of the most common ways that homeowner file, and it involves liquidating their assets, possibly including the house they own in your HOA’s community.
Payment by Liquidation
Bankruptcy trustees usually avoid liquidating property that is under a lien unless there will be enough money after the sale to pay off the lien. In some cases, the sale of the house will cover the homeowner’s HOA debts, with some money left over for other debts. In other cases, this might not be possible, and debts to the HOA could be discharged.
Prioritizing Creditors with Liens
Remember, if the HOA places a lien on a homeowner’s property, the debt is considered secured. In Chapter 7 bankruptcy cases, bankruptcy trustees often prioritize creditors with secured debts over those with unsecured debts. This means that an HOA with a lien is likely to be paid first after the property is liquidated.
Chapter 13 Bankruptcy and HOA Liens
Chapter 13 is another common way to file for bankruptcy and usually does not involve the liquidation of any assets or property.
Court-Approved Payment Plan
Under Chapter 13, bankruptcy petitioners must develop an aggressive yet feasible payment plan to reorganize their finances and pay their debts. Most petitioners remain on their payment plans for about 3 to 5 years. Many payment plans include HOA debt.
No Liquidation
Since Chapter 13 does not involve liquidating any assets, most petitioners keep their homes and remain in their communities. HOAs should note that the payment plan does not eliminate liens on the property. If a homeowner fails to pay the HOA according to the terms of the payment plan, the HOA can still enforce the lien, seize the property, and initiate foreclosure.
Why Pre-Petition and Post-Petition Assessments Must Be Tracked Separately
When a homeowner files for bankruptcy, assessments from before and after the petition is filed must be tracked separately.
HOA Assessments That Arose Before Bankruptcy
Pre-petition assessments, which are HOA assessments that arose before the homeowner filed for bankruptcy, may be discharged by the bankruptcy court. Once discharged, the homeowner is no longer liable for payment, and the HOA may not pursue collection of these debts.
However, if pre-petition HOA assessments are secured by a lien on the property, the lien may remain in place even if the debt itself is discharged. As such, the HOA may still collect the debt if the property is sold or foreclosed.
HOA Assessments That Arise After Bankruptcy
HOA assessments are regular fees that may be imposed on a monthly or quarterly basis. As such, many homeowners who file for bankruptcy still face ongoing assessments from their HOAs. HOA assessments that arise after a homeowner files for bankruptcy are not dischargeable, and the homeowner may remain liable for payment if they retain their property in the HOA community.
FAQs About HOA Liens and Bankruptcy
Does an HOA Lien Survive Bankruptcy in Arizona?
Yes. If HOA debt that is secured by a lien is discharged, the lien may remain on the property. The HOA can still act on the lien and collect payment if the property is sold or foreclosed.
Can Bankruptcy Wipe Out Unpaid HOA Assessments?
Possibly. Unpaid HOA assessments may be eligible for discharge during bankruptcy, but this largely depends on how the homeowner files for bankruptcy (Chapter 7 or 13) and whether a lien secures these assessments.
Are HOA Fines Secured or Unsecured in Bankruptcy?
HOA assessments are often secured with a lien. In some states, a lien may be placed on a homeowner’s property automatically if assessments are unpaid. Other debts, such as fines for violations, are often unsecured.
What Happens to Post-Petition HOA Dues?
Post-petition HOA assessments and dues are not eligible for discharge in bankruptcy. If the homeowner retains the property through the bankruptcy process, they still must pay these assessments, and the HOA may pursue collection.
Can an HOA Collect Assessments After a Homeowner Files for Bankruptcy?
HOAs and all other creditors are prohibited from pursuing collection efforts after a homeowner files for bankruptcy due to the automatic stay imposed by the bankruptcy court. However, HOAs may still try to collect HOA assessments that arise after the bankruptcy petition is filed.
What is the Difference Between a Secured and an Unsecured HOA Claim?
Secured HOA debts are connected to a homeowner’s property, and unsecured debts are not connected to property. When secured debts are unpaid, creditors, including HOAs, may seize the property to obtain payment.
Does the HOA Need to File a Proof of Claim?
A proof of claim is not necessarily required by law, but it may help an HOA strengthen its claim for unpaid debts and improve the odds of actually collecting the money owed.
Talk With an Arizona HOA Attorney About Lien Rights in Bankruptcy
Request a private legal assessment by calling our association governance lawyers with Halk, Oetinger, and Brown at (602) 759-9205.
