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Avoiding the Pitfalls of Tenant Bankruptcy

February 25, 2015 Posted in Landlord/Tenant Law

Avoiding the Pitfalls of Tenant Bankruptcy

As a condominium or homeowners’ association, you have a duty to ensure all residents are paying dues on time and in full. Moreover, you also likely have a set of governing documents (e.g., restrictive covenants) detailing the procedures to follow if a tenant or resident fails to meet his or her responsibilities with regard to the payment of dues. In a problem all-too-common, HOAs are often tasked with difficult “debt collection” duties – and may wind up spending an inordinate amount of time tracking down payments from irresponsible tenants and residents.

As the United States Bankruptcy Court in the District of New Jersey recently pointed out, non-payment of association fees can become an even bigger problem for the property manager in the event the resident seeks a discharge of such debts in a Chapter 13 bankruptcy proceeding. And, as your New Jersey and New York community association law attorney will explain, failure to file a timely objection to the discharge of HOA fee debts could result in the complete forfeit of these payments – which are vital to the existence of your community organization.

Understanding In re Johnson & Specht

The recent case arose after two residents, and members of the Panther Valley Property Owners Association, failed to pay their dues and had the debt discharged in the New Jersey Bankruptcy Court. The Association quickly filed an objection to the discharge, contending that not only were the debts not dischargeable, but that the debtors could not avoid paying the debt by selling the home and moving. Specifically, the PVPOA pointed to language in its restrictive covenants explaining that outstanding debts to the Association were considered a lien on the property and must be paid regardless of whether the residents remain in the home or move to a new location. Interestingly, the debtors attempted to convey the property to the Association in satisfaction of the debt – to which is strenuously objected, pointing to the lien language of the restrictive covenants.

In addition to the contentions over the status of the outstanding Association fees, the debtors also asserted that the Association waited too long to file its objection to their Chapter 13 payment plan – which allows debtors to avoid total liquidation and pay off their debts in time. According to court documents, the Association debt was never listed on the debtor’s schedule of liabilities, which is filed early in the Chapter 13 bankruptcy process. Nearly two years after the confirmation of the debtors’ plan, the Association filed a claim against them in New Jersey Superior Court, which was denied. The Association then returned to Bankruptcy Court, seeking a stay of judgment, which was fortunately granted.

Court Distinguishes Between Equitable and Secured Creditors

After a careful review of current case law, the court concluded that the debtor/creditor relationship between the former residents and the Association was one of “equitable” measure, meaning it was created solely by the language of the restrictive covenants and not by a promissory note or comparable agreement. However, upon the recordation of the restrictive covenants – which is the pivotal fact in the case – made the Association a secured creditor with a priority standing in the allocation of debts and discharges in Chapter 13 bankruptcy. In other words, the debtors absolutely owed the debt back to the Association, and were wrongful in omitting the debt in the schedule of liabilities.

Also, as a secured creditor, the Association can object to its treatment under the payment plan, which would then require the debtors to pay the debt in full until the lien is either discharged or the collateral property is surrendered.

In sum, a community association in New Jersey must be mindful to record its governing documents and by-laws, as well as make a timely objection to a debtor’s Chapter 13 payment plan if the outstanding Association fees are not properly addressed.

Contact a New Jersey and New York Community Association Law Attorney

If you are concerned about unpaid association fees, or would like to avoid missing your opportunity to recoup these fees, contact a community association lawyer at Griffin Alexander P.C. right away. For information, call our New Jersey office at (973) 366-1188 or our New York office at (212) 374-9790. 

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