Frequently Asked Questions: Condominium Law
What happens if a unit owner files for bankruptcy?
This is a frequent occurrence. If the association takes appropriate steps, it should get most, if not all, of the money it is owed from a unit owner who files for bankruptcy.
When a unit owner files for bankruptcy protection, an automatic stay immediately goes into effect. This means that all collection action against that unit owner is stopped until the bankruptcy court gives permission to the association to proceed with its collection efforts. In a Chapter 7 bankruptcy, condominium associations usually request, and are granted, relief from stay so they can proceed with a priority lien claim.
A Chapter 13 bankruptcy involves an effort by the unit owner to reorganize their financial situation by way of a plan to pay back some or all of their creditors. Since condominium fees are considered a secured priority lien, they must be paid by the unit owner as part of a plan. While it may take time, the association should get all of the money it is owed through payment under a plan.
While it is generally not good news when a unit owner files for bankruptcy, since condominium fees are a statutory lien, they are considered a "secured" debt by the Bankruptcy Court. This means that while an individual unit owner may be released from the personal liability for the debt, the priority lien will remain on the unit in a Chapter 7 bankruptcy.
When a unit owner in arrears of condominium fees files for bankruptcy, the association should contact a lawyer trained in this area to assist them with requisite bankruptcy filings. If appropriate steps are taken with the bankruptcy court, an association should be fully protected to enforce its lien, and to be paid everything it is owed, including its attorney's fees.