Of the many exceptions to discharge found in 11 U.S.C. Sec. 523, subsection (a)(16) is perhaps the oddest. That section limits the dischargeability of property or home owners association (“HOA”) assessments, but only for assessments that are incurred post-petition. So, anything incurred pre-petition is discharged. The section states that the bankruptcy discharge does not discharge an individual from a debt
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;
This often creates huges problems for debtors in bankruptcy. Often debtors want to surrender an overencumbered home to the bank,* but the debtor has to keep making payments on the HOA assessments until the deed is formally recorded transferring title to the new owner. And as I have noted anecdotally in my practice and as others have noted, banks seem to take a lot longer to foreclose when an HOA is involved. This makes some sense on the bank’s part, because once the foreclosure takes place, the bank is now liable for ongoing HOA assessments. But before the foreclosure takes place, the HOA assessments are subordinate to the bank’s lien. In some clients’ situations, the bank has taken almost 3 years to foreclose on a lien where an HOA was involved.
For debtors filing bankruptcy, it is important that they remember to make all of their post-filing assessments and to make them timely. Some HOA creditors are relatively lenient, while others can be quite agressive in attempting to collect these. For debtors who face agressive HOA collection tactics, it is imperative that they keep good records that they paid all of their post-petition HOA fees and paid them timely.
*Note: I use the term “bank” loosely to refer to the entity holding the mortgage and the entity enforcing that mortgage. Most mortgages are held in trusts and are serviced by mortgage servicers that don’t actually own the paper and those servicers are not banks. The days are far gone when your local bank owned your mortgage.