Dealing with Homeowners Association Dues in Bankruptcy
By Andrew Christensen, Attorney
August 19, 2014

The dischargeability of home owner association dues is complicated and often misunderstood. It turns out that many times past due HOA fees may be discharged in bankruptcy.

There are several misconceptions about discharging HOA dues that are common among both homeowners and attorneys. It is commonly thought that HOA dues run with land, and are not dischargeable in bankruptcy. Another related misunderstanding is that even if HOA pre-petition dues may be discharged in bankruptcy, they still must be paid in the future when the house is sold because they run with the land and have a special secured status by statute.

These misunderstandings can be resolved when it is understood that the assessments are not the same thing as the covenants. The Covenants, Conditions, and Restrictions (CC&Rs) contain a covenant that is a promise to pay the assessments each month they become due. This covenant to pay the assessments is a separate and distinct thing from the actual assessment, which is the dollar amount of fees imposed each month. The covenants in the CC&Rs can never be removed, but the assessments are regular debts that can be discharged in bankruptcy under a certain set of rules. The truth is that past due HOA arrears are dischargeable in most cases.

The Davis-Sterling act is the source of California law that controls HOA assessments. That law states that monthly dues assessed by the HOA are personal unsecured debts of the homeowner at the time the assessments are made. (Cal. Civ. Code § 5650). If you fall behind too far on your HOA dues, the HOA may file a lien against the property. (Cal. Civ. Code § 5675). The debt becomes secured against your property only once the lien is recorded. This lien does not have any special priority status. (Cal. Civ. Code § 5680). An HOA lien is subject to the standard priority rule that liens are prioritized by the date they are filed. So at the time the HOA lien is recorded, it is last in line.

Past due HOA assessments that are unsecured may be discharged in chapter 7 and chapter 13 bankruptcy. This is because there is no exception to discharge for pre-petition HOA dues in the Bankruptcy Code. As long as you file your bankruptcy case before the HOA records a lien, then the past due amounts are wiped out.

If you plan on keeping your home, you must pay all the future assessments each month after your case is filed. This is because the covenant in the CC&Rs to pay monthly assessments still exists after your case is filed. The HOA still has the right under the covenant in the CC&Rs to impose post-petition assessments every month and those must be paid if you are keeping the property. However, they cannot collect any of the pre-petition arrears that are discharged in bankruptcy.

If the HOA has filed a lien against your property, then that lien can be treated like all other liens in bankruptcy. This means that in chapter 13 bankruptcy if your property is underwater you can file a motion to avoid the HOA lien which will strip the lien from your property, and then the past due arrears will become dischargeable general unsecured debts. But if your property has equity that secures the HOA lien, then you may use chapter 13 bankruptcy to pay the past due amounts in the plan and cure the default. This is generally the only reason for paying HOA arrears in a chapter 13 plan.

However, HOA liens cannot be stripped in chapter 7 bankruptcy. So if you file chapter 7 and the HOA has a lien, then those arrears will ultimately be paid out of the sale of the house because the lien must be satisfied.

If you plan on surrendering your property because you no longer wish to live there, then there are additional considerations. If you file chapter 7, then you must continue to pay post-petition HOA dues until the property is sold or foreclosed. This is because there is a special rule in the Bankruptcy Code that prevents the discharge of post-petition HOA dues in chapter 7 until you are legally off the title to the property. (11 U.S.C. § 523(a)(16)). This is the most problematic issue related to HOA dues.

The common problem is that a homeowner will stop paying the mortgage and HOA dues, move out of the house, file chapter 7 to surrender the property, but then later receive notification from the HOA that they are liable for a large debt for all the fees that came due after the bankruptcy but before the foreclosure. This is a terrible burden on homeowners. In this situation, generally the easiest solution is to stay living in the property after the bankruptcy case and pay the post-petition HOA dues until the foreclosure takes place. Then you may move out of the house after the foreclosure sale. HOA dues are almost always less than what it would cost to pay rent somewhere else during that time.

The other option to avoid post-petition liability for HOA dues on a property to be surrendered is to file chapter 13 bankruptcy. Section § 1328(a) controls what debts are excepted from discharge in chapter 13, and § 523(a)(16) is not included. This means that the exception to discharge for post-petition HOA dues does not apply to a regular chapter 13 discharge. So if you want to surrender your home and move out before the property is foreclosed, you may file chapter 13 bankruptcy and you will not be liable for post-petition assessments that become due after the bankruptcy but before the foreclosure. This rule was upheld in the Oakland Bankruptcy Court in 2010 by Judge Leslie Tchaikovsky in the case of In re Kelly, case number 09-42376.

Discharging post-petition HOA dues in chapter 13 only works if you actually surrender the property by moving out. Bankruptcy cannot be used to remove the CC&Rs themselves from the property, so if you keep the property, you have to pay the future dues.

In reality, HOA assessments are essentially just like every other debt subject to discharge. I have successfully stripped many HOA liens in chapter 13 and discharged the pre-petition dues for my clients who are keeping their homes.

It is not uncommon for homeowners to be wrongfully harassed after bankruptcy by home owner associations trying to collect a discharged debt. Usually this is simply because the association is not familiar with the law. Other times the associations knowingly violate the law. It is also not uncommon for bankruptcy attorneys to mistakenly believe that these debts must be paid. I have represented many homeowners in stopping these illegal collection efforts, and with great success. Most recently it was completely wiping out a lawsuit for over $10,000 against a client for past due assessments that occurred after her chapter 13 bankruptcy case in which she had surrendered the property.

If you are being contacted by a home owners association trying to collect HOA dues after a bankruptcy case, then call today for an evaluation of your case to determine the status of the HOA dues and whether they were discharged.