Homeowners in Bankruptcy typically understand their obligations as far as the home loans go. In a Chapter 7, they typically keep the home and continue making payments, give up the house and get a discharge of the debt or, in rare cases, reaffirm the debt and continue living in the home. These same options are generally available in a Chapter 13 case, except past due payments are caught up in the Chapter 13 Plan. There is a potential trap, however, for homeowners – primarily the ones who choose to leave their homes and get a discharge of the home loans. Under Bankruptcy law, owners are still liable for all Homeowners Association dues (whether a house, condo, or other similar association) from the date the Bankruptcy case is filed until the date the property is no longer owned by the debtor. It does not matter that the owner does not live there or get the benefit of the association. For example, a homeowner may choose to surrender an expensive home in a Chapter 7 case and move to a less expensive home. She will get a discharge of the entire home loan and the HOA dues as of the Chapter 7 filing date. However, after the filing date the dues start accruing again and continue until the lender forecloses. That could be months down the road. The owner is often surprised to get a demand letter for the post-petition dues long after they moved out of the home.
What is the remedy for this? One option is to remain in the house until it is actually foreclosed upon by the lender, without making payments on the dischargeable loan, and understand that continuing HOA dues are a relatively small price to pay for staying in the home a few more months. Another option is to hold off filing a Bankruptcy case until after a foreclosure. That way, all the dues are dischargeable in the Bankruptcy case. Otherwise, if you cannot wait to file, understand that the HOA dues will be a continuing obligation after the case is filed. In the worst case scenario, HOA’s are often willing to settle for less than the actual debt to avoid legal fees and get some money in their coffers. Make sure you disclose your HOA obligation to lawyers in the initial consultation so that they may be considered.