Collection of Delinquent Dues

Obviously, the association needs homeowner dues to be paid, preferably on time, in order to operate. However, there are many residual, undesirable consequences of having too many delinquent accounts. A community with an abundance of homeowners in arrears could be declined for a capital improvement loan when needed, therefore preventing the community from performing necessary major repairs or replacements. The Federal Housing Administration (FHA) also looks at the number of delinquent homeowners in a community in its approval process and will not approve communities with past-due accounts over a certain percentage. If an association can’t obtain FHA approval, which allows potential purchasers to obtain FHA mortgages for homes in the community, owners will have a smaller pool of available buyers. Cleaning up past-due accounts in an expeditious manner will not only benefit the association itself but also all the homeowners who have a stake in the community. How, then, should this be done?

According to attorney Daniel Miske, the first step is to have a collection policy so that each time an owner is delinquent the board does not have to reinvent the wheel as to how to proceed. “Collection policies generally provide that if assessments are more than 90 days past due the matter will be turned over to the association’s attorney for collection. If such a policy is drafted and adopted, it avoids many claims that the board showed favoritism toward one owner versus another,” he explained.

The second step in the process of collecting delinquent dues from an owner, according to Miske, is generally a letter from the association. This is a formal notice demanding that the owner pay his or her outstanding assessments, which are generally detailed in a ledger that may or may not be sent to the owner. This notice also warns of impending legal action if the debt is not paid by a specified deadline. Depending on the situation, the association’s letter may have a variety of other contents.

There are usually two options an association can pursue if the demand letter was unsuccessful in recovering the assessments owed and if any other efforts, such as the recording of a lien, were also unsuccessful. Generally, those two options are filing a money judgment lawsuit or a foreclosure of the lien suit on the delinquent assessments.

Some states, but not Wisconsin, give associations the option of evicting delinquent owners prior to going through the foreclosure process. When this is an option, associations may be less likely to pursue foreclosure, as the lien on assessments will have lower priority than the first mortgage on the property.

In Wisconsin and other states, Miske said that the association has to record a lien before it can foreclose. A lien is generally recorded regardless of whether a money judgement is sought.
A money judgment is a personal judgment against the record owner, which is the basis of attempts to execute on the person’s assets, such as wages and bank accounts. On the other hand, Miske explained, a foreclosure is designed to seize and/or change ownership of the property through a sheriff sale.

If the delinquent assessments are paid in full, by the time required, the property will be restored to the owner. Absent an error made by the association or its attorney, Miske said, “The association is not responsible for any mortgage.” Moreover, insurance and taxes for the property remain the responsibility of the owner until after the sheriff sale is confirmed. Once the foreclosure process is complete—which takes place upon the confirmation of the sheriff sale—the purchaser of the property will become responsible for the taxes, but not the mortgage.

When should an association pursue collecting delinquent assessments? It depends on the association, and perhaps even the state, but most pursue collections after three payments have been missed or after $500 has accrued, whichever comes first. This is an effort to make sure that fees do not immediately overshadow the assessments to be collected. Regardless of when an owner is turned over to the association’s attorney for collection, liens should almost always be filed in a timely manner in order to protect the association. “There’s only a four month window in Wisconsin to file those liens, and if you don’t file them you lose one of your best collection options,” Miske explained. “Additionally, forwarding the matter to your attorney early in the process often makes it much more likely that the delinquent owner can catch up.”

Can associations embarrass their residents by publicly disclosing their delinquencies? Associations cannot and should not embarrass residents in order to motivate them to pay overdue assessments. Doing so in order to punish a delinquent owner could constitute a breach of fiduciary duty or even a violation of their state’s consumer protection laws. Moreover, such treatment may constitute “harassment” under the state’s consumer protection law.

Miske elaborated that federal law, under the Fair Debt Collection Practices Act (FDCPA), provides that publishing or disclosing the name of delinquent owners is prohibited conduct and amounts to harassment under the FDCPA. However, the FDCPA only applies to third party collectors, so associations can argue that it does not apply to them. Miske described the problem as follows: “The state consumer protection act, which in most states does apply to associations, often provides that any person collecting from a consumer shall not harass. Since the FDCPA specifically defines publishing the name as harassment, it’s not much of a leap to believe some intelligent consumer protection lawyer will ultimately say, ‘well, since federal law defines publishing an owner’s name as harassment under the FDCPA, then the same act also amounts to harassment under Wisconsin’s Consumer Protection Act.'” Therefore, when disclosing balances or seeking to collect on an owner’s debt, it is highly recommended for associations to be accurate and to only disclose the debt to the person owing the debt.

As for keeping records throughout a collections process, associations should already have previously adopted policies regarding the collections process and what records need to be kept.

How can an association determine if an account is likely to be collected? One way to determine this is to look at the equity of the house and the balance on the mortgage, Miske said. If the house is worth more than the mortgage, it’s most likely collectible.

On the other hand, according to Miske, if the house is worth less than the balance of the mortgage, the house is empty, or the owner is missing and/or judgement-proof, then collection will be more difficult. However, following a foreclosure, the association could rent the house to generate revenue, which is a common solution.

What if the association deems collection doubtful? As long as a home is owned by a person rather than a bank, and it has not been sold through a sheriff sale, no account can be deemed 100% uncollectible. At the same time, unpaid assessments will continue to accrue until the association takes action. Thus, withholding action on a delinquency both prolongs the time it will take to obtain a judgment against the delinquent owner and causes the association to deal with a bigger balance.

However, if a home is sold through a sheriff sale, and that sale is confirmed by a judge, the previous owner is no longer obligated to pay future assessments; and thus, his or her balance will no longer rise. As Miske put it, “It’s not the sale that ends the debt, it’s the confirmation of the sale by the judge.” When that happens, the association needs to seriously consider writing off the balance.

Once an association determines that it is going to pursue foreclosure, a foreclosure complaint must be filed. If for some reason the unit owner is not accessible, is deceased, does not accept service or evades service, then a foreclosure can usually be served by publication of the summons in a newspaper.

Depending on the state, there may be two options for foreclosure: foreclosure by advertisement (not available in Wisconsin) and judicial foreclosure. Foreclosure by advertisement is a way of foreclosing upon a property without having to go through a court. However, foreclosing in this manner gives the owner an opportunity to recover their property after the foreclosure sale for a certain period of time.

A judicial foreclosure, on the other hand, renders the foreclosure sale final. It involves recording a lien and filing a foreclosure complaint, just as is done with a mortgage. Some states, including Wisconsin, require that all foreclosures be judicial foreclosures, Miske said. A judicial foreclosure must be performed by the court, and a court must enter judgement and authorize the home’s sale. Once the foreclosure complaint is served, there is a period of time during which the owner can file an answer. If the owner does not respond in time, or loses the case, Miske stated, “The association can seek default and proceed with the foreclosure process.” After the redemption period passes — generally six months in Wisconsin — a sheriff sale is scheduled and held, with the buyer from that sale becoming the unit’s new owner upon confirmation of the sale by the judge.

The Fair Debt Collection Practices Act (FDCPA) is a federal law that regulates the collection practices of third-party debt collectors in order to protect debtors. If the FDCPA is applicable with regard to a given debt, then there are a variety of controls on the debt collector pursuing that debt. Associations are not governed by the statute, as the association itself is not a third party debt collector, but collection agencies and attorneys are. Therefore, associations do not have to comply with the FDCPA when setting up payment plans or pursuing debtors, but Miske stated that they may have state consumer protection laws that do apply. “So they better know what they can and can’t do,” he said.

Debt collectors have a variety of obligations in regard to communication with debtors. Consequently, Miske noted, the association’s attorney should be the association’s main form of contact with the debtor. The association’s attorney should be kept informed of anything relating to that unit, to make sure everyone is on the same page. This includes informing the attorney every time a payment is made.

With regard to associations themselves, communications should be undertaken in the best way possible to help ensure the recovery of money owed and to get owners to pay assessments moving forward. Communication directly from the association or management company should be kept open with the debtor “on all other matters,” Miske explained. “But all debt communication should be directed to the attorney.” He continued, “Because in every federal circuit—there are eleven of them—there are slight variations on what can and cannot be stated to a debtor or what is required in the demand letters. In the seventh circuit, which is where Wisconsin is located, there is a particular form to the demand letter if collection is going to be attempted within the first thirty days.” Since board members and managers are not familiar with the various requirements of the FDCPA, Miske advises them to stay away from those discussions.

When possible, communication should be done in writing for documentation purposes and ease of sharing with the attorney. “If the debtor happens to call the board or property manager, confirm the call with a follow up email and forward a copy of the email immediately to the attorney. However, the best practice remains not to have any communication with the debtor about the debt once the matter is turned over to the attorney for collection,” he said.
Collection Agencies
For the most part, it does not make sense for associations to sell unpaid assessments to a collection agency. It may make sense, after a sale has been confirmed, for any unpaid debt by the prior owner to be collected by a collection agency, Miske said. Obviously, the new unit owner would be expected to pay assessments every month going forward.

When hiring a collection agency that bases its compensation upon a contingency of some sort, it is already understood that the association is to accept a smaller portion of the total amount owed. This is because the collection agency will take a specified percentage of the collection as payment if the debt is successfully recovered. If an association is at the point where they have hired a collection agency, then they have already deemed the balance to be difficult to collect. Reclaiming forty percent of an otherwise uncollectible debt is still better than not reclaiming anything at all, Miske noted.

If a delinquent owner is willing to cooperate and sign paperwork, the association should draw up a repayment plan, especially if the balance is relatively small. This is often the best way for associations to recover delinquent fees.

With regard to setting up a repayment plan, Miske said the plan should first be put in writing to protect the association. The agreement should focus on not only the amount of money owed as of the date of the agreement, but also on the amount that has not yet accrued. The length of the repayment period should be reasonable for both the owner and the association — neither too long for the association to ever recover the money, nor too short for the owner to feasibly repay the debt while staying current.

The plan should hold the owner accountable for staying current on future assessments, while still repaying delinquent assessments, he explained. If the owner fails to stay current on future assessments, the agreement should allow the association to take action and foreclose or obtain a judgment on the balance due. This gives the association a way to address the debt if the owner doesn’t follow through with the agreement.

Payment plans may vary by owner, but the association should remain mindful that large variances may be argued by disgruntled debtors as a form of discrimination. Miske said that plans should be drawn according to an owner’s ability to pay, but should not wipe out any of the assessments or debt until all of the payments are made.

Regarding repayment plans, Miske explained, “In Wisconsin it doesn’t hurt you to file a lien, so make sure you protect the debt by timely filing the lien. However, you also have to be careful not to wipe out your lien by accepting a promissory note.” He continued, “Because the note then becomes the debt, you may well have lost your lien rights. A lot of collection people, who don’t fully understand liens and foreclosures, would likely want the note, but the note probably doesn’t help you here.”

Are new owners responsible for paying assessments owed on foreclosed properties? They may under certain circumstances, but associations cannot simply tack on extra fees during the sale of the property in order to recover costs. In some states, but not Wisconsin, if the association has already started the collections process, the new owners (the bank or otherwise) may be obligated to pay some or all of the past due assessments. In some cases, associations may even demand recovery of attorneys’ fees from the new owner.

Alternatively, Miske said the association can implement transfer fees, commonly $200 to $500, on all property transfers to help support the association financially. “A possible outcome is that if a bank obtains a property through foreclosure, that is one transfer, and when it then resells it, which is common, the association gets paid a second transfer fee,” he explained.

Associations should accept partial payments from delinquent owners, though they must be careful when doing so, he advised. If there is any language surrounding the partial payment that implies the owner is paying in full, and the association accepts it, the request for the remaining payment may not hold up in court. Not accepting partial payments at all, on the other hand, could also look bad in court. “So if you receive a partial payment, with language noted on the check or accompanying documents that implies or states in any fashion that it is payment in full, be certain to obtain legal advice as to your options,” Miske said.

In some instances, small claims court may be a viable option when pursuing delinquent fees. It could be a smart and affordable option for an association if the association is experienced in debt collection and knows where assets of the debtor are located — for example, where the debtor is employed.

When an owner fails to pay assessments, the association can bring them to small claims court by filing a standard breach of contract case. This is because the CC&Rs of the association are considered a form of contract, Miske explained, and the owners are expected to pay the assessments as described therein. However, going about it in this way does not necessarily ensure that the association will recover anything. “Equally important is that every association should understand that some owners have been through the small claims process more than once and are very good at delaying things and making them extremely expensive for the association with little risk to themselves,” he noted.

A recommended alternative in some states, but not Wisconsin, may be to file the case under the Forcible Entry and Detainer Act. Doing so may still give the association the ability to at least seize the property and use it to recover fees. Wisconsin does not have a forcible entry and detainer act, Miske stated. “We have no way to get into a unit we don’t own. We have easement rights to go in to fix stuff if it’s a danger to the community, but we have no way to detain and rent it out absent ownership of the unit,” he said.

To “execute” on an asset means to take or seize it. An execution is the physical act of enforcing a judgment. Miske explained that, “In Wisconsin, an execution is performed by the relevant county sheriff department. The sheriff will demand that the owner (debtor) turn over any non-exempt assets. Generally, this procedure works best if the debtor owns a cash business (e.g., bar or laundromat) or has a business with physical inventory owned by the debtor that the sheriff can seize. For the sheriff to actually seize any assets, the creditor must be willing to pay the cost of a bond to protect the sheriff. Another collection option is a garnishment. A garnishment is simply a lawsuit filed against any third party that owes money to the debtor (e.g., bank, employer, or any other third party) claiming those funds for payment of the judgment.”

In your normal wage garnishment, said Miske, the debtor’s employer withholds a certain portion of the debtor’s non-exempt wages (wages above the poverty line). Before the association or any creditor can file a garnishment it must first obtain a judgment against the owner.

If an owner fails to pay assessments, the association can record a lien. Some state laws, but not Wisconsin’s, require that a lien be prepared by an attorney, because a non-attorney’s preparation of the lien could be deemed the unauthorized practice of law. Similarly, if there are found to be mistakes in a recorded lien, the lien will likely be dismissed in court.

Collection of a debt is often dependent on leverage. For this reason, it is recommended that associations do not hesitate to record a lien. In addition, it provides protection to the association in the event of an owner’s bankruptcy or attempt to sell or refinance their property, Miske noted. Some associations may issue their demand letter to the delinquent owner prior to filing a lien, while other associations may file the lien first. As stated earlier, some states, including Wisconsin, also require associations to record a lien prior to going through the foreclosure process. (See Section 779.70 Wis. Stat.)

Miske explained, “Twenty-two states have some sort of lien priority relating to HOAs or condominiums associations. Wisconsin has a statutory lien (see Section 779.70 Wis. Stat.), but it has no priority. Therefore filing a lien early in the process establishes the priority of your association’s lien.”

According to Miske, it is generally not economically advisable to pursue delinquent owners who decide to walk away from their properties. Instead, it is more worthwhile for an association to foreclose on the home and then rent it out to recover money. According to Miske, it is very unlikely that an association will recover something from a delinquent owner other than their home, especially when the owner has already abandoned their home. When an owner “walks away from” their property, they are often essentially trying to give the property to their bank in exchange for not owing the remaining mortgage.

If the association tries to pursue a delinquent owner who has abandoned their property, it can only really pursue that owner’s personal assets. “For example, the owner may have a car or a boat or a cottage, but absent some other asset of value or a steady job, it is very unlikely that the money spent pursuing the delinquent owner will be worth it,” he explained.

The association’s options for pursuing personal assets after receiving a money judgment are fairly limited, Miske noted, but include execution, garnishment or a supplemental exam. However, seeking recovery of debt through personal assets is never a sure thing. For example, if the owner declares bankruptcy, and depending on the type of bankruptcy, the association may never recover that money directly from the owner.

Once an owner files for bankruptcy, all creditors must cease collections against the owner, including the association. This is required by the bankruptcy code. There are usually two types of bankruptcies in a situation like this: Chapter Seven bankruptcy and Chapter Thirteen bankruptcy.

A Chapter Seven bankruptcy entails a liquidation of the owner’s assets. In this situation, once an owner is discharged from bankruptcy court, the association can no longer collect from the owner personally, though it is still entitled to collect on its lien. The association is also entitled to collect future assessments.

A Chapter Thirteen bankruptcy involves creating a repayment plan for the owner in which they must pay the bankruptcy trustee a monthly amount to be distributed to the creditors, including the association. This plan is usually completed between three to five years. In this situation, Miske said the association should recover some of the money owed, if not all.

A judicial foreclosure is a foreclosure via the court system. It involves recording a lien and filing a foreclosure complaint, just as is done with a mortgage. Miske said that some states, including Wisconsin, require that all foreclosures be judicial. A judicial foreclosure must be performed by the court, and a court must enter judgement and authorize the home’s sale. Once the foreclosure sale is confirmed by the court, it is final.

Some states, but not Wisconsin, allow for foreclosure by advertisement, in which the foreclosure notice is published publicly in some manner, including a foreclosure notice on the front door of the property. Foreclosure by advertisement often occurs when the owner proves to be unreachable. A few states allow it as the only form of notice required when pursuing foreclosure.

While a foreclosure by advertisement may be simpler to pursue than a judicial foreclosure, the sale of a property through a foreclosure by advertisement is not necessarily final. After the property is sold, the delinquent owner has the opportunity to recover the property by paying their debt in full, for up to a certain period of time, known as the redemption period. Miske said that the redemption period expires when the owner may no longer recover the property after the sale.

If the home’s lender comes in once the association has already started the foreclosure, can the association discontinue it? The association can discontinue the foreclosure process at any time, but it is not recommended that it do so. Even when a lender has begun its own foreclosure process, Miske noted that there is no guarantee, or law, that requires the lender to finish their foreclosure process. “For example, the owner may pay their mortgage, but not the association. So if the association had dismissed its foreclosure, it would then need to start over,” he said.

Should an association move forward with its own foreclosure once the lender begins their foreclosure process? Associations might be hesitant to start the foreclosure process if they see the lender has already done so, but it should really act whenever it sees fit and not rely on the lender’s actions alone. Alternatively, an association might be more motivated to respond in kind if the lender has already started the process. Miske stated, “The association might also want to look at filing a cross-complaint in the bank’s foreclosure action against the owner for foreclosure, as this would save service and filing fees.”

When must a lender pay delinquent assessments? “After the sheriff sale of the property has been confirmed by the judge. Before that time, the assessments are owed by the delinquent owner,” Miske said.

When is the bank held responsible for the maintenance of the property? “Again it is after the sheriff sale of the property has been confirmed by the judge. But there are laws and local ordinances that may place duties on the bank to perform certain actions while the property is in foreclosure— such as a duty to make sure it is heated so the pipes don’t freeze,” Miske explained. Once the bank receives a deed for the property in its name, it becomes responsible for paying that property’s future assessments until such time as the bank transfers title to the house.

What are the pros and cons of foreclosing on a delinquent owner with the intent to rent out the house to recoup association fees? In general, he said, there are no negative consequences to renting out an empty house that is under the association’s control. Doing so allows the association to both recover debt and potentially secure upcoming assessments from that home, while ensuring that the house stays fit for habitation.

Short sales may or may not be in the association’s best interest, Miske said. Short sales occur with properties that have little to no equity. While a short sale may ensure paid assessments from a new owner going forward, he explained, it will also usually result in the association not recouping some of those delinquent assessments. Associations may be better off going through the foreclosure process and renting out the house in the meantime to recover at least some money, but it depends on the facts of each situation. Miske said, “One thing is certain, an association should not say ‘yes’ or ‘no’ to a short sale without understanding all of the facts.” A short sale is acceptable, however, if it results in a full recovery of debt for the association, even if the lender is at a loss, though that is a rare case.

If an association becomes the owner of a home, Miske said, “Regardless of whether or not there remains a mortgage or other liens on the home, the association may want to rent out the home in order to recover unpaid fees.” It would then find itself in the position of being a landlord. An association’s best practice when it comes to its landlord duties is to follow the law, he advised. Wisconsin, like many states, has detailed laws governing the obligations of landlords, so associations should become familiar with those laws and follow them. In order to meet these obligations, Miske said that many associations hire a professional property manager to ensure compliance with all relevant laws.

If repairs must be made while a tenant is occupying the house, then the association is responsible for making them, he explained, as they are responsible at that point for making sure the house remains habitable, much like a traditional landlord. If the tenant fails to pay rent, the association may need to evict the tenant.

Since the tenants could be dispossessed if a superior lien (e.g., first mortgage of a bank) were to complete a foreclosure sale, Miske said that the association needs to include a provision in the lease addressing the termination of the tenancy under those circumstances.

As for security deposits, associations must follow the same regulations that other landlords must follow. Not following the proper procedures for handling a tenant’s security deposit could subject the association to damages and attorney’s fees for that tenant. Given this, it’s best to have leases reviewed by the association’s attorney.

To sum up the collections options available to associations, absent a voluntary payment by the owner, it generally comes down to foreclosure and/or a money judgment.

A foreclosure is an in rem proceeding, which is an action that focuses simply on the property and does not seek any personal judgment against the homeowner. A foreclosure judgment does not allow asset execution. It is only used to take possession of the delinquent property. The process begins by recording a lien, giving notice to the owner and then, if payment is not made, filing a foreclosure action. There is no foreclosure without a lien.

A money judgment, on the other hand, allows the creditor to take advantage of the post judgment collection remedies discussed in part earlier, including execution and garnishment. “However, there is nothing stopping an association from filing one action seeking both a foreclosure judgment and a money judgment, which is the recommended approach,” according to Miske.