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Post-Petition HOA Fees in Bankruptcy

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 nondischargeable 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 nondischargeable HOA fees accrue until the debtor’s home is foreclosed on 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 nondischargeable 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 property. 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 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 the lender’s claims – including any claim for HOA fees – are based on prepetition 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). Finally, what if a debtor is being sued by his HOA for post-petition assessments before he can get the fees paid by means of the foreclosure-sale process? Well, technically there is nothing to prevent the HOA from suing the debtor, obtaining a judgment, and executing upon that judgment during this interim by, say, garnishing the debtor’s wages. The only potential solution, should this improbable situation arise, is to focus on the end result and attempt to persuade the HOA threatening suit that it would be in its best interest not to do so. As previously explained, an HOA will almost assuredly get its money once the debtor’s home is eventually foreclosed upon. Trying to squeeze a broke debtor for some money during this relatively brief interim is typically going to be a waste of the HOA’s time and legal fees. Instead, an HOA would be wise to simply sit back, wait for foreclosure, and then collect its money without having expended any effort to get it.