A homeowners association (HOA) is a legal entity – often a non-profit corporation – run by a group of volunteer homeowners with common interests in their housing community. The association acts on behalf of homeowners to handle the day-to-day operations required to manage outside and common living spaces in the community through dues collection and hiring contractors to complete work. Typically, a homeowners association is authorized and empowered by the Covenants, Conditions and Restrictions (CC&Rs) document. This document outlines the duties to be handled by the homeowners association, the rules that residents must follow and the permission to collect dues to fund the services. Generally, this document also establishes voting rights for homeowners. To keep the association running properly, the HOA holds regular board meetings and annual member meetings where voting takes place.
Not all homeowners associations are successful in managing money effectively and may run out of the resources needed to perform community upkeep. Some run short on money because they fail to make or maintain an appropriate budget or to collect dues in a timely manner. In the business world, a business may be able to declare bankruptcy when their debts become unmanageable but homeowners associations are rarely allowed to declare bankruptcy. The three key reasons are detailed below.