Q&A: When an Owner Who Owes HOA Fees Is Now Bankrupt

Q. What can be done if a unit owner who has not paid his or her maintenance for a year – and owes the association $30,000 – has now declared bankruptcy? How does the association get its money?

                           —Concerned Stakeholder

A. “The short answer is that an association may not get paid on the arrearage, or at least not all or even most of it,” says Mark Rosenbaum, an attorney with the Chicago firm Fischel & Kahn. “An owner who has gone bankrupt is often in foreclosure as well, which will further complicate things. And if the unit is underwater with the mortgage, the situation becomes even worse for the association.

“My descriptions of the effects of bankruptcy will be a very simplified analysis and will relate only to Illinois law as affected by the Bankruptcy Code. Bankruptcy is a very complicated area of the law. This article does not cover all situations.

“A bankruptcy case is started by the filing of a petition with the Bankruptcy Court. The mere act of the filing results in the entry of what is called the ‘automatic stay’ on all creditors (including the association). That means that no creditor can proceed against the debtor to collect on monies due, without the prior permission of the Bankruptcy Court. The Bankruptcy Court takes the stay very seriously. A creditor who violates the stay will find itself in front of the Court on a charge of contempt. Penalties can and will be assessed. So all collection efforts must stop, including pending collection efforts in state court. And if the unit is owned by more than one person, and only one of them files a petition, collection must stop against the other owner(s) as well.


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