It is common knowledge that when a company or individual files for bankruptcy, all collection activity stops. What is commonly not known is that condominium assessments are, in a manner of speaking, exempt from that rule. The fact is, all collection activity does not have to stop and you can still recover assessments that come due after the bankruptcy action is filed. Let’s read on to see exactly how all this works.
First we need to discuss the basics of bankruptcy in order to understand why it is so important to distinguish between pre- and post-petition condominium assessments. When a bankruptcy petition is filed, an “automatic stay” immediately takes effect halting all creditors from continuing with any attempts at collection of a debt, including any pending legal action. 11 U.S.C. § 362. The filing of a bankruptcy petition is considered an order of relief, granting the debtor (or person filing for bankruptcy) relief from such collection activity by way of the automatic stay. The automatic stay remains in place until the debtor is discharged, unless otherwise lifted by the court.
All debts subject to the bankruptcy action are dealt with in essentially three ways: 1) the debt is paid in full through the bankruptcy estate, 2) a portion of the debt is paid by the estate, typically in a pro rata share with other creditors, or 3) the debt is extinguished. The act of granting a discharge to the debtor extinguishes all debts incurred prior to the bankruptcy petition, and possibly some incurred post-petition, with certain specified exemptions contained within the Bankruptcy Code. See 11 U.S.C. § 524 for more information pertaining to discharge and 11 U.S.C. § 523 for a detailed listing of debts that may be exempt from discharge.
Now let us turn our attention specifically to condominium assessments. The general rule in bankruptcy is that debts incurred pre-petition, or prior to the filing of the bankruptcy petition, are dischargeable and thereafter uncollectable. This is true for condominium assessments even though unpaid assessments can result in a lien on the property. Any assessments that come due prior to the filing of the petition are treated as unsecured debts and can be discharged if the debtor is not participating in a plan for repayment and/or if there are no assets in the estate to pay creditors.
The Bankruptcy Code specifies that assessments that come due after the order for relief, or bankruptcy petition, are non-dischargeable and remain within the responsibility of the debtor for payment.
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt –
(16) for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case;
11 U.S.C. § 523(a)(16). This provision confirms that a debtor is responsible for payments of all assessments that come due post-petition. But what does “becomes due” mean? The United States Bankruptcy Court, Southern District of Florida tackled and answered this question in In re Kelson last year. A condominium association levied a special assessment against the unit owners, which was decided at a meeting held prior to the debtor’s bankruptcy petition, but which was not due for payment until post-petition. In re Kelson, 2012 WL 3990789 *1 (Bankr. S.D. Fla. 2012). The Court was tasked with determining when an assessment “becomes due and payable” under the Bankruptcy Code. The Court determined that the operative date is not the date on which the payment is due by the homeowner, but the date at which the obligation arises. Id at *3. The Court concluded, in this case, that the assessment was dischargeable because the board voted and approved the special assessment at a meeting held prior to the filing of the petition. Id. So, in determining whether an assessment is dischargeable or not, pay special attention to when the obligation actually arose and not just the due date for payment.
In order to pursue the post-petition condominium assessments against a debtor whose bankruptcy action is still pending, perhaps in the plan repayment period, you must seek relief from the bankruptcy court to pursue collection. Filing a simple motion for relief from the automatic stay should suffice, but be certain to confirm how each judge and court handles such action in order to properly comply and not risk inadvertent violation of the automatic stay. And if you are concerned with a statute of limitations issue, do not be. The Bankruptcy Code specifically provides for a tolling of the statute of limitations as stated below:
Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of –
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.
11 U.S.C. § 108(c).
So for all you condominium owners and management companies out there, make note that all is not lost when a homeowner files for bankruptcy protection. While it is likely that a portion, or even all, of the pre-petition assessments will be discharged and uncollectable, all assessments that come due after the order for relief are still fair game.