I still owe HOA Fees after I filed Bankruptcy and Surrendered my Home?

Technically yes. Debtors are frequently surprised to find that they are still personally liable for HOA fees after filing for bankruptcy, even though they have moved out and for all intents and purposes made known their intent in the bankruptcy that they are surrendering their property back to the bank. Such liability is the result of a changes under the new laws to 11 USC 523(a)16.

My colleague, Craig Andresen, Attorney at Law, wrote an excellent blog on the subject not to long ago, and sets forth the realities of the liability under the new laws. I totally agree, and in most cases, the new laws have very little effect due to the nature of the priority of the underlying HOA lien. Under newly enacted 11 USC 523(a)16, That section excepts from discharge “any debt 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 possessor 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 . . . .

The new language being “as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest” is what triggers the liability. So although the bankruptcy is filed and the debtor moves out of the home, the liability continues to accrue until the property is foreclosed upon or sold. Moreover, even after foreclosure, if one still resides in the property prior to eviction, the possessory interest would appear to continue such liability.523(a)16 also does not appear to conflict with11 USC 365(p) regarding the assumption of leases since HOA fees arise from executory contracts and not leases. Thus arguments for protection under 365(p) because no assumption took place would not apply.

So what are the solutions? Probably the easiest solution is not to worry and do nothing. As Craig Andresen mentioned in the other blog, the liability will most likely be satisfied out of the eventual foreclosure or sale since it has priority over the foreclosing party’s lien and must be paid. Thus in a perfect world, its best to file the bankruptcy right before the foreclosure sale date since very little time will accrue between the bankruptcy filing date and the sale date to trigger additional monthly HOA dues.

Another possible solution is to execute a deed in lieu or short sale after the filing date, although such actions are never recommended for the other adverse results they trigger. You can also continue to make the post-petition HOA payments as they come due until the property transfers. Finally, if you reside in California, you may try to argue for protection under CCP 726(a)which technically REQUIRES pursuit of the property prior to bringing any action against you personally. However, the HOA lien will most likely not qualify as a ”mortgage” to fall within the statute’s protection.

So what’s the bottom line? We simply tell our clients to save their HOA fees that come due post petition and hold the amounts in trust pending the results of the eventual transfer. That way, if it ever becomes an issue, the funds are there to satisfy the liability. To date, it has never been an issue and these clients are happy to realize that they have a nice little savings account on the date of the transfer.

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