By Alyssa Gautieri
In a 200-unit association, several unit owners have failed to pay their assessment fees within the last few months. What are some actions that associations can take in order to collect the debts?
According to attorney Stacey Patterson, Esq., counsel with the law firm of Ansell Grimm & Aaron, PC with offices in New Jersey, New York and Pennsylvania, boards should develop uniform collection procedures applicable to all owners. Patterson suggests that before turning over accounts to attorneys, boards should authorize their managing agents to send reminder letters to delinquent owners. A letter can include notice that if the debt is not paid within a certain amount of time (i.e. thirty days), the account will be forwarded to the attorneys for collection. “We generally recommend that communications be limited to just one letter before turning an account over to the attorneys,” Patterson said.
According to Patterson, although the reminder procedure should be uniform, accounts should be handled on a case-by-case basis. “So for example, if an owner responds that they are having financial difficulties rendering them unable to satisfy their debt in thirty days, a board may consider holding off on turning the account over to the attorneys to allow the owner to catch up,” she said. If the letter is ignored and no payment is made, Patterson suggests that the account be turned over at that point.
Patterson does not recommend that boards take any action, which although not necessarily deliberate, may result in embarrassment or humiliation of owners. “Publishing a list of delinquent owners in a newsletter or on a website are examples of this. In some cases, the information may actually be inaccurate by time of publication, if for example, the account has been partially or fully satisfied. For similar reasons boards should also not discuss owner accounts with anyone in the community other than at a board meeting in a closed session for the purpose of determining the best course of action to take next,” she said.
“Once an account is turned over to the attorneys, I always recommend that communications between an owner and management and/or board members cease,” said Patterson. She noted that the reason for this is to ensure that the owner is getting the most accurate account information from one source only. According to Patterson, once attorneys are involved, their offices will have the most up-to-date information including the attorneys’ fees and costs incurred to date including those fees charged but not yet posted to owners’ accounts for work completed.
How does the Federal Fair Debt Collections Practice Act come into play in association collections matters?
“The federal Fair Debt Collection Protection Act (FDCPA) governs the behavior and actions of third- party debt collectors,” according to Patterson. “The FDCPA applies to persons or entities in the regular practice or business of collecting consumer debts. Association attorneys fall within the category of the type of debt collectors contemplated by the FDCPA,” Patterson explained.
“Alternatively, association boards and management companies are not in the regular business of collecting debts and we want to keep it that way,” she continued. “That is why I recommend that boards and management limit their communications with owners about delinquencies, in order to avoid the appearance of being in the regular practice of collecting debts,” she said. Debt collectors in the regular practice must follow the FDCPA’s strict requirements when attempting to collect a debt or face liability for violations thereof.
What happens once an account is sent to an attorney for collection?
“Once an account is turned over to my office,” said Patterson, “we will send an initial letter to the owners containing the required FDCPA language. Pursuant to the FDCPA guidelines, the initial communication must include very specific language including notice of the owner’s rights and obligations in disputing a debt. If an owner disputes a debt, we will send them information supporting the debt. If there is no response from the owner at that point, we will counsel the board about how to next proceed. Recommendations are based on things such as history of payments (or lack thereof), available assets, equity in the home, etc.,” she continued.
Patterson noted that she always suggests recording a lien against a home as soon as possible, regardless of what steps the board will decide to take next (i.e. civil suit for a money judgment or a foreclosure). “A lien secures the association’s interest against the owner’s home. An owner must satisfy the debt securing a lien before they can sell or refinance their home. Also, a lien may serve to secure a portion of the association’s interest in a bank’s foreclosure of the home or in the event an owner files bankruptcy. A lien is also the basis for an association’s own foreclosure against a home,” she said.
What is the difference between a civil money judgment action and a foreclosure?
According to Patterson, a money judgment is an action against the person, whereas a foreclosure is an action against a home. “I typically recommend money judgments if the owner is known to be gainfully employed and/or has personal assets (i.e. bank accounts) that can be levied upon. Without assets, a money judgment is merely an unenforceable piece of paper. On the other hand, foreclosure is a more aggressive approach because the owner is risking loss of their (likely) largest asset – their home. Before offering advice, I always suggest conducting asset searches so I can provide an educated opinion as to likely effective course of action,” she said.
What role does an association play in a bank’s foreclosure of a home in the community?
“An association that records a lien prior to the commencement of a bank foreclosure will typically be named in the action based on the existence of the lien,” said Patterson. She noted the reason for this is because a bank will want to wipe out all junior lienholders in its foreclosure action to convey clear title at its foreclosure sale. “In New Jersey, a prior recorded lien enjoys a limited priority over a bank’s interest in the amount of six months of assessments due at the time the lien was recorded. The limited priority is authorized by the New Jersey Condominium Act- N.J.S.A. 46:8B-21 (the “Act”),” she said. Patterson continued that “New Jersey homeowner associations do not enjoy (limited) lien priority status as they are not governed by the Act.” She additionally noted that New York condominium liens also do not enjoy a similar lien priority over a bank’s interest, as the New York Condominium Act does not authorize the same.
“Once a bank completes its foreclosure, if the title reverts back to the bank at its sale, the bank becomes responsible for payment of assessments and charges associated with the home in the same manner as an individual owner. Accordingly, associations can pursue banks for unpaid assessments in the same manner as individual owners as well,” she said.
Should associations be willing to waive the payment of common charges/assessments from owners who are suffering financially due to the effects of the COVID-19 Pandemic?
“The short answer to this question is no,” said Patterson. “In these unprecedented and uncertain times, associations will likely see an increase in delinquencies. People are and will continue to face great financial difficulties for months and possibly years to come. The last time we saw something similar to this was after the devastation of Superstorm Sandy. After Sandy, some people were forced from their homes due to physical destruction. People had to find (and incur the expense of) temporary alternative housing. In those cases, delinquencies increased. People forced to move out of their homes felt they should not be responsible for payment of maintenance fees and/or common charges while they could not live there and enjoy the benefits of living in a community.”
She explained that this ideology is detrimental to associations. Associations cannot function without the payment of assessments and common charges from their owners. “As long as owners hold title to units, regardless of whether they are living there or not, they are unconditionally obligated to pay common charges and assessments. Such obligation cannot be waived for any reason. Associations are obligated to continue providing essential services to their owners to ensure their safety, health and welfare. When owners do not pay, for whatever reason, it makes it extremely difficult to fulfill such obligations,” she said.
According to Patterson, payment of common charges and assessments are very different from rent payments. “If a renter stops paying their rent for whatever reason, it affects only the landlord and non-paying renter. It will not have a sweeping effect on all renters. On the other hand, one non-paying owner in an association affects all owners who are forced to subsidize that owner in order to ensure that the association has the necessary funds to provide services to everyone — payers and non-payers alike,” she said.