Bankruptcy Tip of the Day for December 15, 2012 – “The Homeowners’ Association Dues Trap”
Section 523(a)(16) “The Homeowners’ Association Dues Trap”
The idea of filing bankruptcy is to get a “fresh start” in life by discharging your debts. Some obligations are not discharged in bankruptcy. Child support obligations are one type of debt not discharged. Student loans are not discharged in bankruptcy unless you file a separate application with the bankruptcy judge for a hardship discharge. Hardship discharges for student loans are rarely granted. Most people know that student loans and child support are not discharged. Many people assume that tax debts are not discharged in bankruptcy, but this is not always true. Some older tax obligations actually are discharged.
Today’s tip of the day is about homeowners association dues. Here’s the problem. Suppose you lose your job and can’t pay the mortgage on your home. You might decide to surrender the home to the bank and file bankruptcy to discharge the debt to the bank. That’s fine as far as it goes. The bank can foreclose on the home, sell it at a sheriff’s sale and if the home doesn’t bring enough to pay off the mortgage, your bankruptcy discharge relieves you of the debt to the bank. You walk away free and clear, right? Wrong, if your home is subject to homeowners association fees. The bankruptcy code Section 523(a)(16) says that so long as the home is in your name, you are responsible for any homeowners association dues that are assessed after the date you file the bankruptcy. Sometimes months or even years go by after you surrender possession of the home to the bank and file bankruptcy before the bank completes the foreclosure. Even if there was a judgment of foreclosure entered before you file the bankruptcy, there could be a long delay before the bank schedules a sheriff’s sale. Until the sheriff’s sale takes place and the sheriff’s deed is recorded, the home is still legally titled in your name and you are responsible for the ongoing homeowners association dues.
What can be done to avoid the HOA fees trap? One way would be to wait to file bankruptcy until the foreclosure is completed. Sometimes there are other pressing reasons to file bankruptcy such as a wage garnishment. If you can’t wait, then you could stay in possession of the home even after the bankruptcy is filed. Although you would have to pay the HOA fees, you would be living there without having to pay the mortgage so it might be an affordable alternative. If you can’t afford even the HOA fees or if you can’t live there for some other reason like you’ve had to move away because of a job relocation, then you could try to rent to home out for at least enough to pay the HOA fees and liability insurance. Yes, it is a good idea to keep liability insurance coverage on the home as long as it is in your name. After bankruptcy is filed, you would not be able to discharge any claim that might come up for an injury sustained on the property. And, there are other obligations related to property ownership. You have to comply with weed ordinances by keeping the lawn mowed. For some properties, environmental regulations could be an issue.
The HOA fees trap and other complications due to continued ownership of property you are willing to abandon are not always easy problems to deal with. The first step in addressing the problem is being aware of it. Now you know.