Bankruptcy Basics for Board Members
Bankruptcy 101- What You Need to Know
It should be no surprise to anyone that the current economic conditions have led to a surge in personal and business bankruptcies. Soaring bankruptcies are undermining many Atlanta community associations’ efforts to collect delinquent assessments and causing budget shortfalls. As a Board member, you need to have a basic understanding of bankruptcy terminology and what it means to your community association.
The Bankruptcy Stay
First and foremost, an automatic bankruptcy stay also becomes effective on the petition date that remains in effect until the bankruptcy is dismissed or the owner is discharged by the bankruptcy court. This means that community associations and all other creditors are prohibited from taking action against the debtor to collect a debt owed by the debtor unless the creditor first receives permission from the bankruptcy court. The bankruptcy protection also applies to property owned by the debtor, such as the debtor’s home and vehicles, which then becomes known as the bankruptcy estate. Once the debtor has filed for bankruptcy protection, the association cannot not take any action that affects the bankruptcy estate, including recording a lien against title to the property, foreclosing on the property or the suspension of amenities and services.
Pre-Petition vs. Post Petition Debt
Once a debtor files for Chapter 7 or Chapter 13 bankruptcy protection under the U.S. Bankruptcy Code, the date on which he filed becomes known as the “petition date”, and the account balance as of this date is now known as the “pre-petition balance”, while all amounts that come due after the petition date are known as the “post-petition balance.”
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is one in which a debtor enters into a court-approved payment plan in order to repay all his or her debts. Generally, a debtor who files for Chapter 13 protection is an individual who is employed and is seeking to retain his assets. In these cases, the individual will create a Chapter 13 Plan, where he agrees to make monthly payments into the Court for a period of up to 6o months, which should provide the debtor with sufficient time to pay back all of the secured pre-petition debt and most, if not all, of the unsecured pre-petition debt. In addition, debtors are required to continue making their regular post-petition payments directly to their creditors. However, before a creditor can receive payments for any pre-petition debt under the Plan, the creditor must submit a Proof of Claim, indicating the amount of money the debtor owes to the creditor as of the petition date. The creditor will then receive monthly trustee payments over the next several years until the pre-petition debt, as stated in the Proof of Claim, is paid in full.
Often, a debtor will fail to include the correct amount due to a creditor in their Chapter 13 Plan. Under these circumstances, the creditor
will have to file an Objection to Confirmation of the Plan to ensure that the correct pre-petition debt is reflected in the Chapter 13 Plan. Once the Objection has been filed, the Bankruptcy Court will hold a Confirmation Hearing and will not allow the debtor to enter into the payment
agreement until the amount of the claim is resolved. After the Court approves the Plan, the Plan is deemed confirmed. Once the debtor has completed his or her Plan, the debtor is discharged and the bankruptcy case is closed.
Unlike a Chapter 13 case, a debtor who files for Chapter 7 is usually unable to repay his or her creditors. Because the debtor is completely released from his or her responsibility for his or her debts, recent changes to the bankruptcy laws were made to curtail abuse of this section of the Bankruptcy Code. When a debtor files for bankruptcy under Chapter 7, it is usually a signal that any mortgage holders will soon be foreclosing on the debtor’s property. From the petition date to the discharge date, a typical Chapter 7 case lasts approximately four to six months.
Collection of Post-Petition Assessments
In either type of bankruptcy filing, associations are prohibited from taking collection action to collect the pre- or post-petition debt while the bankruptcy is pending. However, an association is permitted to send letters requesting payment of delinquent post-petition assessments, as well as file suit and obtain a judgment for the post-petition delinquency. The association may also be able to record a lien against the title to the property. However, the association cannot take action to collect the judgment (such as file a garnishment) or enforce its liens (i.e., foreclosure).
Although Boards may find a debtor’s bankruptcy filing to be frustrating, all is not usually lost. In many ways, bankruptcy is simply a delay of the inevitable. The debtor must either repay the debt, or lose title to the property. In addition, the recent bankruptcy reform has greatly curtailed the serial filings that so many associations found particularly frustrating. One way or another, bankruptcy usually results in the debtor’s home being sold to someone else who resumes the payment of association dues.
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