Discharging HOA Fees in Bankruptcy When Surrendering a Condo
Mortgage debt on upside down property is easily discharged in bankruptcy, as is any HOA fees owed before the filing of the Bankruptcy. But the consumer will need to surrender property before the bankruptcy or quickly after filing in order to avoid future obligations on the HOA fees.
Discharging HOA Fees on Upside Down Property in Chapter 7Often, a consumer filing Chapter 7 bankruptcy has a condominium, or other property, that they no longer wish to own, usually because the mortgage debt on the property is now greater than its market value. These properties might be secondary or vacation residences purchased at the height of the market for investment or recreation purposes. In the current economy, however, these (now underwater) properties and their mortgages, combined with other mounting debts, can cause major problems. A Chapter 7 bankruptcy can discharge (wipe out) any personal obligation on the mortgage for a deficiency following foreclosure. The consumer, however, may also have built up arrears on home owner association (HOA) fees for the property. The good news is that a Chapter 7 Bankruptcy will discharge any personal obligation on the HOA fees that has accrued before the filing of the bankruptcy. The tricky part, though, is that they may still be obligated to pay any HOA fees that accrue following the filing of their Chapter 7 petition. This is because bankruptcy can only discharge debts that were owed before the bankruptcy was filed. So, personal obligations on mortgage debt will be discharged completely, as the obligation was incurred before filing. However, if the consumer is still on the title for the condo or other property with HOA fees, they will continue to owe all fees that accrue each month after the filing. To end the obligations on the HOA fees, the consumer needs to get off the title to the property.
What Can Be Done?If the property is in foreclosure, but the consumer has not yet filed, and can continue to wait to file, it may be best to allow the foreclosure process to go through. Once a court grants a judgment for foreclosure, the bank will have ownership of the property, and the HOA fees will no longer be the obligation of the consumer. If they file a bankruptcy after that point, all past due HOA fees can be discharged in the bankruptcy along with any personal obligation that may remain on a deficiency related to a foreclosure sale/auction. And all future HOA fees will not be the consumer's responsibility as the title was transferred back to the bank. Most people who need bankruptcy, however, cannot wait because other creditors may be obtaining judgments; garnishing wages, restraining bank accounts, harassing them for payment and generally making life miserable. So, if a bankruptcy must be filed now, a consumer may be able to arrange a transfer of the deed back to the bank after filing the bankruptcy. If the property is already in foreclosure, a bank may be willing to accept a deed in lieu of foreclosure. Once the bank has the title to the property, the HOA fees should no longer be the responsibility of the consumer. After filing a bankruptcy, though, such a deed transfer will likely require an order granting the bank relief from the automatic bankruptcy stay so that it may take actions to settle the pending foreclosure suit. And it will likely require the consent of the trustee. This should not be hard to get, as there is little to no value in the upside down property and liquidation would not be worth the trustee's efforts.