This article is provided by the Queen Creek bankruptcy lawyers at Wilson-Goodman & Fong, P.C.
Many debtors, and even practicing bankruptcy attorneys, are surprised to find that post-petition homeowner’s association fees are not dischargeable in bankruptcy. Section 523(a)(16) of the Bankruptcy Code exempts from discharge any “fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association.”
This means that HOA fees that arise after a debtor petitions for bankruptcy are not dischargeable. But these non-dischargeable fees only accrue so long as “the debtor or trustee has a legal, equitable, or possessory interest” in the property. This typically means that the non-dischargeable HOA fees accrue until the debtor’s home is foreclosed upon or sold.
Of course, these fees are generally not a problem for the Chapter 13 debtor that intends to keep their home after bankruptcy. For debtors, typically of the Chapter 7 variety, who plan to surrender their home, however, these accumulating fees can be worrisome. Sale or foreclosure can be a lengthy process, and a debtor can do little but wait while this non-dischargeable debt continues to rack up.
There is good news though. Even though the Bankruptcy Code makes it very clear that post-petition HOA fees cannot be discharged, the debtor very rarely ends up the one ultimately responsible for paying them. The reason why lies in the very nature of foreclosure: after the lender forecloses on the property, but before it can sell the home, the lender has to ensure that it can convey clear title to the new owner. In most states, including Arizona, past due HOA fees operate as a lien upon the property. So, in order to sell the home, the lender will have to pay off any outstanding liens or encumbrances, including any HOA fee lien. Once the outstanding HOA fees have been paid, the debtor no longer has any financial obligation to the HOA. Instead, he simply owes his lender more money because the lender had to pay the fees on his behalf, so to speak, in order to foreclose on and ultimately sell the home.
By now you’re probably wondering: “well, aren’t these still post-petition HOA fees? Won’t my debtor just be responsible to the lender now instead?” Fortunately, no. All of the debtor’s financial obligations to the lender are legally grounded in the promissory note and mortgage agreement originally signed by the debtor long before bankruptcy. That means that all of the lender’s claims – including any claim for HOA fees – are based on pre-petition agreements that will be discharged by the bankruptcy. In the end, the chances are very good that the debtor will never actually feel the financial sting of Section 523(a)(16).
This means that HOA fees that arise after a debtor petitions for bankruptcy are not dischargeable. But these non-dischargeable fees only accrue so long as “the debtor or trustee has a legal, equitable, or possessory interest” in the property. This typically means that the non-dischargeable HOA fees accrue until the debtor’s home is foreclosed upon or sold.
Of course, these fees are generally not a problem for the Chapter 13 debtor that intends to keep their home after bankruptcy. For debtors, typically of the Chapter 7 variety, who plan to surrender their home, however, these accumulating fees can be worrisome. Sale or foreclosure can be a lengthy process, and a debtor can do little but wait while this non-dischargeable debt continues to rack up.
There is good news though. Even though the Bankruptcy Code makes it very clear that post-petition HOA fees cannot be discharged, the debtor very rarely ends up the one ultimately responsible for paying them. The reason why lies in the very nature of foreclosure: after the lender forecloses on the property, but before it can sell the home, the lender has to ensure that it can convey clear title to the new owner. In most states, including Arizona, past due HOA fees operate as a lien upon the property. So, in order to sell the home, the lender will have to pay off any outstanding liens or encumbrances, including any HOA fee lien. Once the outstanding HOA fees have been paid, the debtor no longer has any financial obligation to the HOA. Instead, he simply owes his lender more money because the lender had to pay the fees on his behalf, so to speak, in order to foreclose on and ultimately sell the home.
By now you’re probably wondering: “well, aren’t these still post-petition HOA fees? Won’t my debtor just be responsible to the lender now instead?” Fortunately, no. All of the debtor’s financial obligations to the lender are legally grounded in the promissory note and mortgage agreement originally signed by the debtor long before bankruptcy. That means that all of the lender’s claims – including any claim for HOA fees – are based on pre-petition agreements that will be discharged by the bankruptcy. In the end, the chances are very good that the debtor will never actually feel the financial sting of Section 523(a)(16).
If you need answers to your chapter 7 bankruptcy or chapter 13 bankruptcy questions, please contact the lawyers at Wilson-Goodman & Fong, P.C. through their website or you can call them directly at 480-503-9217. They have offices in Gilbert and Queen Creek to serve the entire East Valley.
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