Foreclosure, Bankruptcy, and

Short Sales101An Illustrated Primer for HOAs and

Condominiums

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Assessments

o HOA or Condominium assessments create a claim against the owners, personally, and also against the property subject to the Declaration of CC&Rs.

o This can be pictured as two distinct claims.

o Foreclosure is an action brought by a lending institution or some other party who has received a property interest as part of the financial arrangements to purchase real property.

Foreclosure

F

Foreclosure

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o The claim against the original owners is cut off by the foreclosure, i.e., assessments cease to accrue.

o However, a judgment may be sought against the original owners for the pre-foreclosure balance.

o The new owner becomes liable for post-foreclosure obligations, including assessments and violations.

Terminating the Rights of Other

Creditorso When property is properly foreclosed,

all junior lienholders’ (including HOAs) claims on the property are extinguished.

o In recent market conditions, junior lienholders rarely recover from residential foreclosure sales.

Bankruptcy

o The filing of a bankruptcy petition automatically stays collection of all pre-petition debts and obligations.

o The HOA or condominium association is no different.

o The HOA or condominium needs to be aware of the filing date.

BK

BK

Bankruptcy

o If a discharge is granted to the debtor, all assessments, fines, violations, etc. relating to the debtor are wiped out and cannot be collected on.

o However, the lien on the property remains.

§ 523. Exceptions to discharge(a) 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;

BK

Bankruptcy

o Also note: “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”

o The debtor has this type of interest in the property until a new owner appears on title.

o Simply offering to tender the property in bankruptcy does not affect title.

United States Bankruptcy Court,D. Arizona.

In re Monica Emilie JOHNSON, Debtor.No. 2:08-bk-13937-SSC.

 May 1, 2009.

In re Monica Emilie JOHNSON, Debtor.

The Court advised the parties at the hearing that if a creditor has a valid, pre-petition lien, that lien “carries through” the bankruptcy proceedings. Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992).

In re Monica Emilie JOHNSON, Debtor.

Pre-petition liability also would have been extinguished as a personal liability of the debtor. 11 U.S.C. § 523(a)(16).

In re Monica Emilie JOHNSON, Debtor.

Counsel should advise the debtor solely of the liability for fines or assessments which has accrued after the debtor filed her bankruptcy petition … up to the date of the Trustee's Sale... Any other liability has been discharged.

Short Sales

o “Selling Short” means that the original owners are going to sell their property at a price less than what they owe the bank on the purchase mortgage.

o Nothing about a “short sale” affects the rights of an HOA or Condominium Association.

F Bankruptcy

Foreclosure

Short Sales

o However, short sales are usually conducted in the shadow of bankruptcy and foreclosure proceedings.

o If the HOA has filed a lien on the property, the HOA should be contacted prior to the closing of the short sale.

Short Saleso It is important that the HOA understand

its position.o Often, the HOA’s lien must be satisfied

before a short sale can be completed.o If the short sale does not go through,

bankruptcy or foreclosure may result.o The parties to the short sale have

incentive to try to pressure the HOA to take less than a full lien payoff.

o The HOA should weigh the pros and cons of bankruptcy or foreclosure before releasing its lien.

o This presentation has been shared as a public service.

o This presentation does not create an attorney-client relationship.

o The author is an Idaho attorney, and this information may not apply in other jurisdictions. You should consult local counsel for more information.

o Vial Fotheringham LLP represents clients across the Intermountain Northwest.

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