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What Happens When a Homeowners Association Goes Bankrupt

Posted by sonrise on October 8, 2014
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A homeowners association (HOA) is mainly funded by monthly fees from homeowners. A homeowners association is run like a business and when they are mismanaged they run the risk of becoming bankrupt. Bankruptcy mainly occurs due to embezzlement, mismanagement, or theft which is very rare. Additionally, their revenue can greatly decrease due to home foreclosures which causes the number of paying members to decrease. The first sign of problems is noted when the homeowners association begins to withhold the financial situation from its members.

What Happens When a Homeowners Association Goes Bankrupt

How does a Homeowners Association File for Bankruptcy?
A homeowners association may file for bankruptcy under Chapter 11, which allows them to reorganize themselves financially. All liabilities are frozen and the homeowners associations has to disclose all streams of income and assets to the courts. During the process, the management of the homeowners association remains intact although any major decision will need to be approved by the court. Once a re-payment plan has been developed, however, the homeowners association management will be under the court’s trustee until it is able to function beyond bankruptcy.

Protecting homeowner assets
When creditors win a court case against a homeowners association, they will have the right to seize all their assets. This may not directly affect homeowners but services may stop being provided in the common areas. Bankruptcy halts the collection of the property temporarily so that the community can keep its assets.

With the help of legal counsel, a homeowners association may reorganize in order to re-pay their debts and set them on a healthy financial path. Payments are made to the Trustee of the USA. If they are unable to operate, the court appoints a third party to take over the daily operations.

Existing contract
A homeowners association can reject the existing contract and leases which may affect residents indirectly or directly. Additionally, they can also reject the declaration of restrictions conditions and covenant of the community. The residents then lose their rights to common facilities.

Affect of bankruptcy to communities
If a HOA goes bankrupt, the community may find itself at risk of losing access to common areas and services such as bike trails, swimming pools, or club houses. If it has filed bankruptcy under Chapter 7 some of these assets will have to be liquidated to pay creditors. This damages the community in different ways:

Interruptions of normal structures such as water, electricity, and sewers, etc.
Difficulty for homeowners selling their homes as potential buyers needing a mortgage would not be able to obtain title insurance for the property

Decline in value of the homes

Due to these reasons, property owners may lobby to lay criminal charges against the HOA for financial mismanagement.

Bankruptcy of apartment complexes brings changes to all tenants. When a HOA files for bankruptcy, tenants need not worry as they are protected but there are times they have to take action if they are to stay in their apartments. The HOA, now known as the debtor in the courts, is granted a “stay” that prevents creditors from collecting money from them. This gives the HOA time to reorganize so as to pay its creditors.

In worst case scenarios, the government takes over the HOA during the difficult time and public revenues are used to maintain the community. If the property is to remain in the hands of the HOA, re-payments have to be made with private funds.

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