Having a community member who is already in default file bankruptcy can be a severe blow to the association. While it is a given that the chances of recovering unpaid assessments are reduced by the filing, taking a proactive stance can minimize the association’s exposure. This report details the important steps for the association to take. Some of the steps below are applicable to all cases; others are unique to the particular type of bankruptcy case.
Stop all collection activity.
The mere filing of a bankruptcy case acts as an automatic stay of any action to collect a debt. This includes recording liens, sending delinquency letters, filing or continuing a lawsuit, terminating utilities, revoking privileges, or calling the debtor. If the association’s management company automatically sends out delinquency letters each month, it should (be able to) flag its computer to note that the community member is in bankruptcy and no further demand letters should be sent. The penalties for a willful (i.e., knowing) violation of the automatic stay are actual damages, punitive damages, and the debtor’s costs and attorney fees. Do not assume your attorney got notice, too: call him. The automatic stay continues until the case is dismissed, until the debtor receives a discharge AND the trustee abandons the community property, or until the stay is lifted by the court, usually on motion of the creditor.
Get the case number.
In a not insignificant number of cases, the association learns of the filing when the debtor calls to advise he has filed. If the association or its managing agent should get such a call, ask for the debtor’s case number. Armed with the case number, the association can get more information about the case, including the Notice of Commencement of Case (discussed below). With the record number of filings happening and the similarity of names, attempting to search for the debtor by name can be frustrating, while each case is assigned a unique case number.
Obtain a copy of the Notice of Commencement of Case.
The most common method by which the association gets notice of the case is receiving a copy of the Notice of Commencement of Case in the mail. This document is mailed at the beginning of the case to all creditors listed by the debtor in his schedules. It contains a significant amount of information and lays out the future course of the case. It reveals the debtor’s case number, attorney’s name and address, the trustee’s name and address, the chapter under which the debtor filed, the date for the meeting of creditors, the date for filing proofs of claim (unless the schedules indicate that the debtor has no assets from which claims may be paid), and the date of the confirmation hearing and the last day to object to confirmation for a Chapter 13 case. If the association does not receive one, it should obtain one from the court.
Send copies of all correspondence you receive about the case to your attorney.
Although you attorney will file an appearance on your behalf, it takes a while for these to be indexed, and debtor attorneys are notoriously slow in updating their mailing list. If you receive something from the court, the debtor’s attorney, or the trustee, send it to your attorney.
Attend the meeting of creditors.
In every bankruptcy case, under every chapter, the court sets up a meeting at which creditors of the debtor may ask questions about their debt. This is the association’s opportunity to obtain valuable information, such as whether the debtor intends to keep the community property, sell it, or abandon it, whether the debtor occupies the property or rents it out (and if rented, the names of tenants, the monthly rental, the term of the lease, and whether the tenants are in default), and what other liens are against the property, whether those other creditors have taken steps to liquidate their liens, and what condition the property is in. It is not necessary that the association’s attorney attend the meeting of creditors; a board member can do so.
File a Proof of Claim (unless the Notice of Commencement tells you not to).
A proof of claim is nothing more than a statement of the arrears that existed as of the date of filing of the case, including assessments, late charges, interest, recording and court costs, and attorney fees. Unless the debtor objects, the proof of claim is automatically allowed and is prima facie evidence of the amount of the debt. If no proof of claim is filed, the association will not receive any payment.
Obtain and review the Plan.
In a Chapter 13 case, the debtor is required to file a plan outlining how he intends to pay his creditors within 15 days of filing of the case. For a community association which recorded a lien on the debtor’s principal residence before the case was filed, the debtor’s plan should provide for cure of the arrears due at the time of filing within a reasonable period of time and to maintain the current monthly assessments during the pendency of the case. If the plan does not do so, the association should file an objection to confirmation.
Follow up on confirmation or discharge.
For a chapter 13 case, the court must review and pass on the debtor’s plan. If the court approves it, the plan is confirmed and the trustee starts disbursing funds to creditors. If the plan is not confirmable and cannot be made confirmable, the court will dismiss the case. Thus, it is important to follow up on the confirmation hearing. In a chapter 7 case, the debtors will be discharged from their debts unless a creditor objects. The discharge signifies the end of the case for the debtors (although maybe not for the trustee).
Monitor the case after confirmation.
If the trustee stops sending you money, it usually means that the debtor is not paying the trustee. If the debtor is not paying the trustee, creditors can request that the court lift the automatic stay so that they can proceed with their state law remedies. At the least, a tapering off of payment deserves more attention. The association can request a copy of the trustee’s records regarding payments made by the debtor and payments disbursed by the trustee, to determine the status of the case.
Notify the Trustee, the Debtor, and the Debtor’s attorney of any payment changes.
A typical Chapter 13 case lasts 3 years, and can last up to 5 years. A change in the assessment amount is bound to occur during this period. When it does, the association must notify the trustee of the payment change so that he can make payment at the higher rate. If the association does not notify the trustee of payment changes, the association may not be able to collect the difference once the bankruptcy case ends.