Community associations have significant weapons to collect delinquent assessments, including filing liens, obtaining money judgments, and initiating foreclosure.
All owners are assumed collectable unless they have declared Chapter 7 bankruptcy. The most successful method of collecting delinquent assessments is by having the board enact an administrative late charge. If the balance remains unpaid, the next step is usually a collection letter sent by the association’s legal counsel. If that fails, a lien is filed against a property and if the lien remains unpaid, a small claims money judgment or foreclosure action may be initiated.
Even if the board believes that collection is doubtful, normal collection procedures should be followed that would ultimately result in a foreclosure sale of the unit to a new owner. The board would be breaching its duty if they permitted a delinquency to go on in perpetuity. A foreclosure sale to a new owner would “stop the bleeding” of bad debt.
A board should not engage in any practice that attempts to embarrass the delinquent owner. There are sizeable risks associated publishing names and account information of delinquent owners. If there is an error, a board could face a defamation claim for erroneously reporting that someone hasn’t paid a debt.
The association commences a judicial foreclosure through the filing of a complaint with the county court or common pleas. This litigation is determined by a judge. Ultimately, if the judge agrees a debt is owed, the judge orders the county sheriff to sell the property and pay the debtors in the chronological order their lien was filed, and deeds the property to the new purchaser.
A reverse mortgage foreclosure is the exact same as a judicial foreclosure. However, instead of a bank foreclosing on its first mortgage, or a community association foreclosing on its lien, a lender would foreclose on a reverse mortgage for funds it lent to a borrower.
Once a foreclosure is filed, the board relies on the association’s attorney to move the foreclosure proceedings through the court system.
Once collection is initiated, a wise board will stop any and all communication with the delinquent owner regarding the delinquency.
There is risk of inconsistency if various parties are communicating with a delinquent owner. In order to avoid inconsistency on the amount owed, on the terms of a payment plan, or any other issues, a wise board has the association’s attorney serve as the sole point of contact through the collection process. Further, the Federal Fair Debt Collections Act likely can apply, and so all communications should be handled through legal counsel.
Associations are permitted to charge back to a delinquent owner the reasonable costs of attorney fees incurred in the collection of a delinquent account. As a result, most Ohio community associations initiate legal proceedings through a lawyer to collect unpaid assessments as it is then able to generally recoup 100% of the unpaid assessments, late charges, plus legal fees. Collection agencies, on the other hand, charge a percentage often one-third or 40%, which is usually not recoverable.
If an owner expresses an ability to enter into a repayment plan over time, the board is able to make the business decision as to whether or not to accept the payment plan.
Do not accept nor consider payment plans that are unrealistic. Entering into a payment plan that fails the first month wastes everyone’s time and delays recovery. Both the board and the owner need to be realistic about what payments are feasible. One of the biggest mistakes a board can make is setting arbitrary payment plans without looking at individual circumstances. In addition, a board should make clear that with any repayment plan, the association’s collection policy will continue to be followed. In other words, a board should not hesitate to secure collection of the debt by filing a lien even if a payment plan is in process.
No, the board should never accept less than the full amount or tell a delinquent owner to not worry about paying their debt.
The Fair Debt Collection Practices Act (“FDCPA”).
The Fair Debt Collection Practices Act is federal legislation that governs the collection of debts against consumers. There are many obligations placed on debt collectors under this law.
FDCPA applies only to third party debt collectors. It does not apply to individual board members attempting to collect a debt; however, over the years community associations across the country have witnessed verbal abuse, physical abuse, and even shootings when individual board members have attempted to become debt collectors. For their own safety, our office strongly recommends that individual board members avoid attempts to collect delinquencies. A board member should never be pounding on an owner’s door yelling at them to pay up.
A wise board will regularly monitor the progress of a collection case once it has been filed in court. Our office has a password protected portal for our client associations which permits board members to log in and see up to the minute activity or progress in the collection of the delinquent account that has been filed in court.
Garnishment is the taking of a portion of a delinquent owner’s wages in order to satisfy a delinquent account owed to the association.
A bank attachment is a taking of a delinquent owner’s funds being held by a bank in order to satisfy a debt owed to the association.
A lien is a legal document that must accurately depict a description of the delinquent owner’s property as well as an exact amount owed. A lien should be filed by the association’s attorney.
A lien may usually be filed for any assessment that is more than 10 days past due. Our office recommends that every association has a collection procedure. I attached a sample procedure that reflects our recommendation that a lien be filed on any account that is three months past due.
In any legal collection proceedings, unique circumstances may demand unique approaches. If an owner is clearly uncollectable, an association’s attorney may encourage a bank to accept a short sale so that a new owner is in the home sooner, paying monthly assessments sooner, and stopping the bleeding of bad debt.
Is it advisable to go after delinquent owners who decide to walk away from their properties, particularly those owners who did a strategic default?
Yes, there is a wide assortment of remedies to collect against an owner who walked away from their property. In collection efforts we handle, we not only seek sale of the delinquent owner’s property, but also a money judgment against that owner. Our office successfully collected delinquent assessments years after a delinquent owner walked away from the property.
Is it advisable to pursue foreclosures against delinquent owners, or allow banks to foreclose and assume the related financial obligations?
One of the biggest mistakes our office sees association boards make is to sit on their hands and assume that a bank will ultimately foreclose. Under today’s economic conditions, banks have a multitude of pressures preventing them from foreclosing. As a result, associations should not hesitate in any manner to initiate foreclosure proceedings.
For associations with a small annual assessment, including homeowner associations, small claims is a viable option. Small claims is not usually a viable option in condominium associations, where unit owners may use as a defense that the association has failed to do maintenance or provide a service, and so a small claims court may reduce or eliminate the amount a unit owner in a condominium must pay.
If the bank joins a foreclosure the association has already started the process, can the association discontinue it?
Yes, but it would be a mistake for the association to sit on the sidelines when a bank joins a foreclosure. The association’s attorney is able to expedite foreclosure proceedings by timely filing appropriate motions. An association should never discontinue its collection efforts.
Should the association move forward with its own foreclosure once the bank begins the foreclosure process?
The party initiating the foreclosure is required to name as a party all those with a lien on the property. If the association files the foreclosure first, the bank joins the association’s foreclosure. Even if the bank is a party to the foreclosure, the association also remains a party and the association’s attorney should do everything possible to expedite the proceedings.
Once a bank or other party takes title to a residence through foreclosure, it is treated the same as any other owner and becomes responsible for maintenance of that property. Our office finds that communication with the appropriate bank personnel more often than not will result in cooperation from the bank to maintain its property.
The period of redemption is set by statute and is the period of time during which a debtor – or other entity with an interest in the property they want to protect – can pay all sums due and retain title to the property.
Regrettably, Ohio has not followed the lead of many other states by enactment of a super lien statute. As a result, unless an association’s governing documents stipulate otherwise, a lender or any other foreclosure sale purchaser is not required to pay assessments levied prior to the foreclosure sale date.
What are the pros and cons of the association foreclosing on a delinquent owner with the intent to rent out the unit to recoup the association fees?
As part of foreclosure proceedings, Ohio law permits an association to ask a judge to appoint a receiver, who will collect the rents during the pendency of the foreclosure and pay the association, not the owner/landlord
It is unique for an association to be acting in the role of landlord. Most associations do not own a residence and if they do, the residence is normally occupied by a staff member, such as a custodian. If an Ohio community association actually owns a leased residence, the community association must follow the extensive Ohio landlord tenant laws.
The association must keep a statement of account for each owner, whether delinquent or not. However, when an account is delinquent, the account itself will at some point be required by the court as evidence of the delinquency. As a result, all Ohio associations must keep complete and accurate records of account for each and every owner and these records must be especially kept current in the instance of a delinquent account.
What are the differences in approach with regards to liens, foreclosure, district court actions, circuit court actions, and money judgments?
I strongly recommend that each and every association have its own collection policy and procedure. By having its own policy and procedure, a board avoids differing approaches for different owners and even more importantly, avoids claims of discrimination or selective enforcement. See the copy of our collection procedure attached.