Homeowner Association Dues In Bankruptcy

When an individual files bankruptcy  he or she is frequently behind on mortgage payments and or  homeowner association dues. The amount owed on these particular debts are discharged in bankruptcy, which means the homeowner cannot be forced to pay them; however the mortgage company and the homeowners association do maintain a lien on the property for the amount owed. This means these creditors have to be paid out of the sales proceeds when the house is eventually sold before the homeowner receives anything. Or in the case of a mortgage company, they can foreclose on the house and take it away from the owner if the mortgage is not paid.


In the case of homeowner association dues there is the additional restriction, that the dues are only discharged if they were incurred before the bankruptcy was filed. The association can go to court and enforce payment for dues that fall due after the bankruptcy filing. This may sound reasonable for a person who continues to occupy the house, but if an individual finds a job in another state and is forced to move this can be a burden, especially if he cannot sell the house and it ends up being foreclosed on. In the current economic environment foreclosures often require a couple of years to work their way through the courts, and all this time association dues can be mounting up.

Using Bankruptcy to Stop Foreclosure

Many individuals facing bankruptcy are also behind on their mortgages and looking at a likely foreclosure of their homes. Thus a frequent question that bankruptcy attorneys here is whether the bankruptcy can stop the foreclosure.

The answer is that a Chapter 13 bankruptcy in which a person makes monthly payments to partially repay their debts can include in their plan a provision to pay back any arrearage on their mortgages and thus end the foreclosure. A Chapter 7 bankruptcy in which the debtor makes no payments does not stop the foreclosure; however, it can sometimes serve to slow down the procedure and thus allow the homeowner to stay in his or her home longer.

The filing of the Chapter 7 bankruptcy creates an automatic stay, which forbids a creditor from taking any action to enforce a debt, and this requires a mortgagee to put the foreclosure action on hold until the homeowner receives a discharge. Whether this actually slows down the foreclosure is somewhat a matter of chance. The mortgage company might be waiting for the statutory minimum periods to pass and the bankruptcy will make no difference. Or the creditor could go into bankruptcy court to allow the resumption of the foreclosure.

In the current environment though in which the courts are way behind processing the backlog of foreclosures a minor delay often turns out to allow the homeowner to stay in his house for a number of additional months.

Perfecting Mechanics Liens in Bankruptcy

        Mechanic’s liens are a secured debt, and therefore while bankruptcy will discharge the obligation to pay the money owed for the services performed, the holder of the mechanics lien can still force a sale of the property to collect what he is entitled to under the contract, or wait and demand his share of the proceeds when other circumstances cause the owner to dispose of the property.

        Section 362 of the United States Bankruptcy Code creates an automatic stay when a debtor files bankruptcy, which prevents a creditor from taking any action to enforce the debt, after a bankruptcy is filed. Since a mechanics lien needs to be recorded to be enforceable, a bankruptcy lawyer  sometimes hears the question, whether the creditor may record the mechanics liens after his customer files for bankruptcy.

         At first glance the answer may appear to be no, since clearly the reason a creditor records a mechanics lien is because he is hopeful that this action will improve his chances of collecting from the creditor.  Section 362 however provides an exception for perfecting liens that are in existence prior to the bankruptcy filing. Since by law the mechanics lien arises, when the work is done, this means that the creditor holding the lien will still be able to record it after the debtor files.