Beware what happens to HOA fees after Chapter 7 - even if you surrender your home
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Do you live in a neighborhood or condo complex with homeowner's association fees? If you start having money problems, this may be one of those bills that you just can't pay. If you file bankruptcy to get out of debt, it's important to know how these dues are treated in bankruptcy. You may think (or hope) that because it is an unsecured debt that it will be discharged along with your credit card or medical bills, and it's true that an existing balance will go away, but this is a continually generating debt (unlike these others), so it can spin out of control again even after you file Chapter 7.
Special Bankruptcy Laws Apply to Homeowner's Association Dues
Unlike other types of unsecured debts relating to your home (including second mortgages unsupported by equity), homeowner's association fees were accorded their own section in the bankruptcy code. Section 523(6) of the law states that the following is non-dischargeable: a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest. That may sound as clear as mud, but we'll explain below.
HOA Dues Incurred Prior to Filing Bankruptcy
Some homeowner's association fees can run into the hundreds of dollars a month. If you can't pay them, they can pile up into a tidy sum quickly. No matter how much you owe, the amount that has accrued prior to your filing will be discharged. That can be a huge load off financially, but it isn't the answer to all of your homeowner's association woes. It's what happens after this that's the problem.
HOA Dues Incurred After Filing Bankruptcy
If you plan to keep your home and are current on your mortgage or have worked out an alternate payment plan with your lender, it's important that you keep up with all HOA dues from your date of filing forward. If, however, you are behind on your mortgage and give up your home as part of your bankruptcy action, other debts associated with the home can be forgiven (difference between mortgage and home value, second mortgage or home equity line of credit).
Bankruptcy and foreclosure may not be the end of your homeowner responsibilities
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But if the lender doesn't foreclose promptly, any HOA dues, fines or municipal charges levied against the home will still be your responsibility and the bankruptcy won't have any effect on them. This can cost you big and muddy the financial fresh start you were hoping for.
When It's Better to Wait and File Chapter 7
Even if you've been sent letters from your mortgage lender saying they are going to foreclose, until they actually do, the burdens of maintaining the property, including HOA dues still sits with you. Some lenders drag their feet for a year or two on foreclosing for a variety of reasons. You are better off remaining in the home even if you're not paying your mortgage payments until the house is foreclosed on and repossessed.
In many states, even after the lender forecloses, if they don't take possession of the home (i.e. send you formal dispossession/eviction documents), you can still be liable for the HOA dues and property maintenance. A new law passed in North Carolina in 2013 changed it so that as soon as a property is foreclosed on, the assessments switch over to the purchaser as of the date of the sale, even if they don't take possession promptly or record a deed change with the county, but this may not change the way municipal fines are treated – because this is a new law, we'll have to see how it plays out in practice.
If you're dealing with a backlog of HOA dues and other debts and want to find out what your debt relief options are in Raleigh, Durham, Fayetteville or anywhere in North Carolina, contact the law offices of John T Orcutt for a free consultation on bankruptcy.