©2003 Steve Sowell
I had the pleasure of presenting a seminar session on collecting assessments from delinquent condominium, homeowner, and cooperative owners at the first annual CAI-Michigan Conference and Trade Show. For those of you who missed it, this article is a somewhat curt digest of some of the more salient points I covered regarding homeowner and condominium assessments.
Adopt a Collection Policy
I cannot stress enough the importance of having a written collection policy adopted by the board of directors and published to the membership. Your documents, supplemented by Michigan law, will tell you the procedure for collecting assessments, but will not tell you the timing or the strategies involved. Having a written policy tells the members of the association exactly what to expect if they become delinquent, and tells the board what to do about a delinquent member. I recommend the following:
- Send a politely worded letter when the member is 10 days delinquent with the first assessment.
- Send a second, more strongly worded letter when the member is 10 delinquent with the second assessment.
- Send a third letter advising the matter is being turned over to the attorney when the member is delinquent with the third assessment.
- Direct the attorney to record a lien before the co-owner becomes 4 payments behind.
- If not already provided by your documents, adopt a late charge. Usually a percentage of the payment (4% is common) is better than a set charge.
Avoid Risky Policies
I get asked frequently if an association can post a list of delinquent members, trying to “shame” them into paying. It used to be the list would be posted at the clubhouse; nowadays, it’s to be posted on the association’s website. In a word, DON’T. You’re likely to buy a defamation/slander/false light lawsuit by doing so, especially if you are slow about updating the list.
Treat everybody equally. It is hard to vote to put a lien on your fellow board member whom you meet with every month, but playing favorites can cause any number of potential losses to the association.
Once you have turned the matter over to your attorney, let him handle it. A percentage of members are going to try to “end run” around the attorney and talk to a board member directly. Not only should individual board members not be making decisions without a quorum and majority of the board, talking to the delinquent member about the matter gives the member the opportunity to tell the attorney “well, the board member told me ...” requiring needless extra work by the attorney.
Fair Debt Collection Practices Act
Your management agent and your attorney trying to collect your delinquent assessments are subject to the federal and Michigan Fair Debt Collection Practices Act. These acts define anyone who regularly collects the debts of another as a “debt collector,” and subjects that person to a whole host of regulations. Among these are the required statutory warnings which must either be in the initial communication or sent within 3 days of the initial communication. They are:
- I am attempting to collect a debt from you. Any information obtained will be used to collect the debt.
- The name of your creditor is XXX.
- The amount of your debt is $XXX.
- Unless you dispute the validity of this debt within 30 days of the date of this notice, the debt will be assumed to be valid.
- If you dispute the debt within the 30 days, we will obtain verification of the debt and the name of the original creditor, if different from the current creditor.
If the member disputes the debt, the attorney or the agent must provide verification of the debt, and cease all collection activities until the verification is provided.
Perhaps most importantly, the attorney or the agent may only collect a debt owed. For instance, if your documents provide for a $5 late charge, the attorney cannot collect a $25 dollar late charge, even if the board of directors has passed a resolution. The attorney or agent cannot collect a “processing fee” or a “reinstatement fee” or any other fee unless specifically authorized by the documents.
A violation of the acts can subject your attorney or agent to statutory damages of up to $1,000 per violation, actual damages, and payment of your member’s costs and attorney fees. Your agent and attorney should be complying with the act, which means there may be some delays and/or requests for additional information from you.
Bankruptcy
Bankruptcy is a scary word to most associations, agents, and attorneys alike. Most are not familiar with the terms and concepts. The following is a quick primer of some of the concepts covered in my presentation:
Debtor--the person who files a bankruptcy case; i.e., your member.
The Automatic Stay--the invisible injunction which compels creditors to stop all collection action when a member files a bankruptcy case. No demand letters, no liens, no new lawsuits, no continuing old lawsuits, no termination of privileges, etc. Willful violations of the automatic stay can result in significant sanctions.
Chapter 7--the debtor gives up his nonexempt assets and the trustee liquidates them to pay unsecured creditors. Once the bankruptcy is over, secured creditors (did you record a lien before the filing?) can pursue the asset, but not the debtor.
Chapter 13--the debtor keeps his assets, but devotes his future income stream to payments of the debts that existed on the date he filed. Secured creditors are paid either the amount of the debt or the fair market value of the asset, whichever is less.
Proof of Claim--a document filed by a creditor which sets forth the amount of debt owed at the time of filing, together with a copy of the security agreement (the lien), if any.
If it is not already apparent, it is important to have filed the association’s lien BEFORE the member files bankruptcy. Secured creditors are usually paid in full; unsecured creditors are usually paid 10¢ (or less) on the dollar. Since it is the policy of most mortgage companies to start foreclosure when a mortgage is three months delinquent, and since the commencement of foreclosure proceedings is the trigger for most bankruptcy filings, you can see why I recommend that a lien be recorded before the member becomes 4 months delinquent.
The one absolute about bankruptcy is that creditors lose: either money, or time, or both. The association’s objective is to minimize the losses. This requires an active participation in the process. In a chapter 7 filing, the association should consider a motion for relief from the automatic stay. In a chapter 13 filing, the association should file a proof of claim, obtain and review the chapter 13 plan (and object to confirmation if necessary), and monitor the debtor’s payments to the trustee, filing a motion for relief from the stay if necessary.
Collection of assessments (indeed, any delinquent debt) is a time-consuming, arduous process. The sole objective is to maximize the recovery. An informed creditor who has a firm collection policy in place and pursues that policy firmly and fairly will recover more of the delinquent debt than a creditor who is less diligent or less informed.