Bankruptcy Issues for Community Associations

August 14th, 2020

Posted in Asset Protection,Business & Corporate Law,Real Estate Law

The purpose of bankruptcy laws is to provide an opportunity for a fresh start to honest but unfortunate individuals (or debtors in the bankruptcy context) and to allow for the equal treatment of creditors who may be owed money.  The successful completion of a bankruptcy plan generally entitles the debtor to a discharge of certain debts.  The discharge of a debt prevents creditors from later attempting to collect the discharged debt.  Additionally, 11 U.S.C §362(a) imposes an automatic stay on any collection activity against the debtor or their assets.  The automatic stay begins immediately upon the filing of a bankruptcy petition and acts as a temporary injunction preventing collection activity by creditors.  Generally, the automatic stay will remain in place during the life of the bankruptcy proceedings unless the creditor obtains a court order granting relief from the automatic stay.

Community associations can run afoul of the bankruptcy laws which protect debtors by either attempting to collect a discharged debt or by violating the automatic stay.  These violations can result in significant sanctions.  While a demand for payment from a debtor protected by the automatic stay may be a clear violation, community associations and their managers should also be cautious about taking covenant enforcement actions while there is an ongoing bankruptcy.  For example, a demand that an owner re-sod their lawn or re-paint their home would require the debtor to expend funds and could also be a violation of the automatic stay.             

There are many intricacies to bankruptcy laws which may affect how your community can or should handle a specific bankruptcy matter.  In general, it is wise to tread lightly with respect to any collection activities or covenant enforcement matters against a debtor in bankruptcy.  If your community receives notice that an owner has filed for bankruptcy protection, they should cease all collection and covenant enforcement activity and immediately contact their attorney for further advice.

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