Delinquent homeowner dues accounts can affect a community in a variety of negative ways. 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 on their assessments could be declined for a capital improvement loan when needed — therefore, preventing the community from performing necessary major repairs or replacements. Also, the Federal Housing Authority (FHA) looks at the number of delinquent homeowners in a community in its approval process and won’t approve communities with over a certain percentage of past-due accounts. If an association can’t obtain FHA approval, allowing potential purchasers to obtain FHA mortgages for homes in the community, it can have a hugely negative impact on home sales for the entire neighborhood. 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 should this be done?
According to Illinois attorney Robert Prince, associations have several options to collect assessments but they usually start with a thirty-day notice that complies with specific statutory requirements. This notice includes details on what the individual owes, the total assessments (late fees, fines, attorney’s fees, etc.) and outlines certain legal rights the owner has in regard to responding to the notice. Prince stated that most Illinois associations pursue actions for possession under the Forcible Entry and Detainer Act, which allows the association to evict a delinquent owner. This is unusual compared to other states, which have to go through a foreclosure process to collect.
If the owner does not pay the amount requested in the demand, which includes attorneys’ fees and costs incurred in pursuing collections, the association can file a lawsuit with the circuit court of the county the property is located in. If the association receives a judgment and the owner still fails to pay by a deadline set by the court, the association can have the sheriff evict the occupants of the property. The association can then choose to lease the unit to a tenant to try and pay down the debt.
It is important to note that the association only has the right to possession of the property. It does not become the owner of the unit. The owner, assuming payment in full is eventually made, will eventually be restored to possession of the property. Since the association is not the owner, it is not responsible for the mortgagee, insurance or taxes for the property, which remain with the unit owner. In the foreclosure process, the purchaser of the home at the foreclosure sale will become the new owner and responsible for all of those obligations.
It is unusual for associations to pursue foreclosures for a few reasons. First, if there is no equity in the property, the association will receive nothing as part of the process because the association’s lien will have lower priority than the first mortgage on the property. Additionally, the foreclosure process can take a year or more to complete. In contrast, a proceeding under the Forcible Entry and Detainer Act is meant to be an expedited proceeding that can be over within four months.
When to begin to take action is generally dependent on the amount of the monthly or annual assessments. If the monthly assessments are lower, the association will want to wait for several months before beginning the collection process. Many associations pursue collections after the owner has missed three assessment payment or $500, whichever comes first. This is in an effort to make sure that there is a miscommunication on payments and to make sure that the fees do not immediately overshadow the assessments to be collected. Additionally, it is usually easier for an owner to catchup and pay a lower balance quickly and get back track. As the amounts get higher, it starts to spiral out of control for most owners.
Illinois associations do not generally use collection agencies to pursue delinquent assessments because they operate on a contingency relationship. In such a situation, the collection agency will get a percentage (often 33%) of the collected amounts. This cuts into the amounts the association realizes from collections. Additionally, because the association can usually recover its attorneys’ fees as part of the collections process, the association has the opportunity to lose nothing in the process. The one place associations can use collection agencies is where an owner has not declared bankruptcy and lost his or her home to foreclosure. In such a situation, there is a lower chance of collecting on the delinquent assessments. Thus, a contingency relationship may reduce the risk in this scenario.
Prince stated that the association and its management have to be cognizant of the fact that the case is in collections and that the attorney needs to be ‘in the know’ about everything related to the unit. Boards should not negotiate payment plans with the owners directly without working with the attorney to make sure everyone is on the same page. Additionally, management needs to inform the attorney whenever a payment is made so that accurate information can be relayed to the owner as well as the court.
Prince went on to state that associations can accept partial payments from owners. There is nothing in Illinois law that prevents or penalizes associations for accepting partial payments as long as there is no limiting language on or with the payment. For example, if the owner sends a check that states payment in full on it, cashing the payment acts as payment in full. If an association refuses to accept a partial payment that does not restrict the payment, a court will generally look on that decision unfavorably.
Legally, an Illinois association can post lists of delinquent owners though it would be highly unusual to do so. The Condominium Property Act and the Common Interest Community Association Act both allow boards to discuss delinquencies in a closed session, likely related to privacy concerns. By publishing the names of delinquent owners the association is destroying that privacy. Moreover, if the association lists the amount owed form each owner, it better be right. If the association is mistaken as to someone’s delinquency or if the amount is wrong, the association is likely liable for defamation.
Judicial foreclosure is a process in which a lienholder (usually a bank) can execute on its interests recorded against the property due to a failure to pay. Some states allow a lienholder to foreclose on a lien without involving the courts. In Illinois, associations can use a judicial (court based) foreclosure proceeding to foreclose on its liens against the property. The association is required to send notice to everyone who has interest in the property and file a lawsuit. The minimum amount of time it will take for the case to go through the foreclosure process is nine months, but it usually takes a longer period of time to complete the process.
deally, after an association has turned a file over for collections, all communications should be through the attorney office when possible. However, courts do not like when management completely cuts off communication, forcing the owner to communicate solely through the attorneys office. Thus, property managers should be as helpful as possible but speaking without giving definitive answers about what is owed. This is because there could be attorneys’ fees and costs that have not posted to accounts as of yet. Communications in writing are also best because the communications can be easily sent to the attorney to keep them abreast of
what has occurred.
Prince strongly encourages repayment plans under appropriate circumstances. Prince stated that “Repayment plans are often the best option to get the association paid.” However, associations have a duty to make sure they are not foregoing collections by allowing abnormally long payment plans. Prince thinks that associations should add an approved payment plan in its rules and regulations, including flexibility to deviate from the approved payment plan.
What terms should a repayment plan include? Prince recommend that any payment plan require the owner to pay the outstanding balance within six or twelve months. It also should require owners to pay assessments as they come due so that the delinquency does not get worse. Moreover, the payment plan should state that the owner admits the amounts are owed and that, if the owner fails to adhere to the plan, the association is entitled to a judgment and an order for possession.
Can associations offer different payment plans to different people? Repayment plans are often dictated by an owner’s ability to pay. However, Associations should provide similar plans to individuals in similar circumstances, as much as possible. If it fails to do so, the association could be subject to a lawsuit for discrimination in violation of the Fair Housing Act. Any deviations from the standardized plan or denying any payment plan must be based on different facts, such as whether the owner has failed on other payment plans in the past.
Absolutely not. Boards are obligated to diligently pursue the collection of assessments. If a board were to forgive or forego an owner’s assessments, it has violated its fiduciary duties. A board has the ability to negotiate and forgive non-assessment charges such as legal fees and fines, but it must do so consistently amongst the owners.
Can an association impose a fee on homebuyers who have purchased properties that the association took over to recoup some of the costs?
Associations are not allowed to tack extra fees and costs on a foreclosure purchaser to recoup its costs. The purchaser is responsible for assessments from the first day of the first month after the sale. Further, if the association instituted an action to collect assessments, the purchaser from the bank or a purchaser from the sale other than the bank is obligated to pay up to six months of assessments plus costs to the association. In addition, if the association is a condominium association it is also entitled to recover its attorneys’ fees from the purchaser.
The association can adopt a special assessment to cover a gap caused by a foreclosed owner’s failure to pay. In such a case, the purchaser, like all other owners, are responsible for its proportionate share of the assessment.
The Fair Debt Collection Practices Act (FDCPA) is a federal law that regulates debt collection from consumers. Associations are not debt col- lectors, they are creditors. Attorneys collecting on behalf of the association are debt collectors. The FDCPA requires the attorney to include certain disclosures on its correspondence to owners to make sure they know their rights to dispute the debt, among other things. It only applies if the owner is a natural person who uses the property as a consumer (occupancy by owner or family) rather than as an investor.
Prince stated that associations can use a garnishment proceeding to attempt to collect form a delinquent owner. This usually comes in the form of a wage garnishment, where the owner’s employer is required to withhold a portion of the owner’s nonexempt wages (those wages over and above the poverty line). Before the association can use a garnishment, it must first obtain a judgment against the owner.
If an owner fails to pay assessments, the association can record a lien against the unit. Prince stated that it is unusual for condominium associations to file liens in Illinois. This is because condominiums have a statutory lien. That means that when a condominium assessment is un- paid, it is superior to mortgages and other liens that are recorded later. Associations can request that a lien be recorded but only at its request. As for non-condos, there is no statutory lien. Still those associations do not generally file liens in Illinois because a foreclosure by the first mortgagee will extinguish the lien. Generally, an association can avoid the attorneys’ fees and costs to record the lien. Prince continued by stating that there has been one case in Illinois where an association was sued for filing a lien against an owner because the lien stated the wrong amount of what was owed at the time.
Associations can file standard breach of contract cases in small claims court if an owner fails to pay assessments. This is because the CCRs re- quire the owner to pay assessments and the owner breached that duty when he or she failed to pay assessments. However, Prince recommends that associations pursue Forcible Entry and Detainer Act cases because it limits the defenses that owners can raise. In a forcible case, owners can only raise issues related to possession. In a small claims case, the owner can file more defenses and claims against the association.
Moreover, it can be difficult to collect on a small claims judgment. The association can only utilize traditional post-judgment remedies such as wage garnishments and freezing bank accounts. If there is no money in a bank account or if the owner does not make enough money, the association may not recover anything. With a forcible case comes the threat of eviction. If an owner and the owner’s family could lose one of the necessities of life (shelter), they will generally come up with the money if they can. If they cannot come up with the money, the association can proceed with the eviction and potentially lease the unit to a tenant.
The bank is only legally responsible for the unit and assessments if title has transferred to the bank. This only occurs where a sheriff’s deed has been issued in a foreclosure or some non-foreclosure deed has been issued in its name. This most often occurs when a deed-in-lieu of foreclosure is issued, which is where the owner gives the property to the bank generally in exchange for not being personally liable for any amounts owed on the mortgage. The bank will have to send a copy of the deed to the association in order to assert its ownership rights.
Is it advisable for an association to cease its collection efforts once it is understood that the bank has started to begin the foreclosure process? It depends. If the association is a condo association, the risk is very small that it will lose its attorneys’ fees. This is because the association should receive its attorneys’ fees and costs will be paid by the purchaser at the foreclosure sale other than the bank or a purchaser from the bank after the sale.
For non-condominiums, the association will want to ask its attorney opinion on whether it makes sense to pursue collections, which is an educated guess at best. If the likelihood of collecting before the bank will complete the foreclosure process or if the assessments at issue are so small as to make collections not cost effective, the association will not want to waste its money pursuing collections because the purchaser at the foreclosure sale or from the bank after the sale is not obligated to pay attorneys’ fees. If it is a close call, the association should err on the side of trying to collect rather than not.
The redemption period is the time in which an owner can pay off the mortgage in full after the foreclosure case is initiated. Unless the court shortens the redemption period, the owner has seven months from when the complaint is served or 3 months after judgement is entered, which- ever occurs later, to pay off the mortgage. The expiration of redemption refers to that date when the owner can no longer force the bank to accept payment in full to save the owner’s home.
How can associations get bank-owned properties to pay their maintenance fees or force them to deal with maintenance issues?
In Illinois, if a bank does not pay assessments, it is subject to collections just like any other owner with some added benefit. Particularly, if there is not a second mortgage on the property, there is generally no risk that the association’s interests will be extinguished in a subsequent fore- closure. Likewise, there is little risk that the association will not collect since the bank has ownership of the unit and literally made of money. For condominium associations there is an additional inducement for banks to pay. A Supreme Court of Illinois opinion states that if a bank fails to timely pay assessments after the foreclosure order approving sale is entered, the bank could be responsible for the entire balance of the unpaid common expenses and other charges from the previous owner.
Prince said that an association has the same duties to a tenant as a traditional landlord. If there is an issue that comes up that affects the habitability of the unit, the association will have to fix the repair issue. The association is not inherently responsible to the owner when a tenant fails to pay rent, but it could breach its fiduciary duties if it fails to address a tenants failure to pay.
Since the tenants could be disposed when a foreclosure is completed, the association needs to, at a minimum, include a provision in the lease allowing for termination of the tenancy. Also, the association should be cognizant of the fact that it will have to turn the lease over to the owner when the owner’s account is brought to a zero balance.
Associations also have to make a decision on whether to keep a security deposit. In the City of Chicago, landlords taking a security deposit have to strictly comply with the Chicago Residential Landlord Tenant Ordinance (RLTO). The RLTO requires landlords to give a receipt stat- ing the bank that the security deposit is held in, to keep the security de- posit segregated from the landlords own money and to pay interest to the tenant yearly on the security deposit, among other things. If the association does not, it could be subject to paying significant damages and attorneys’ fees to the tenant. Thus, it is best to have a proposed lease reviewed by the association’s attorney.
When an owner files for bankruptcy, the bankruptcy code requires creditors to cease collections actions against the owner. This is called the automatic stay and it prevents creditors from going after prepetition debts (those that existed immediately before the owner declared bankruptcy). There are two general types of bankruptcies we see from owners – Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is a liquidation of the owner’s assets. Owners generally do not have much, if any, unencumbered (no liens) assets. Thus, when the owner is granted a discharge from the bankruptcy court, the association cannot collect from the owner personally. However, it is able to collect on its lien.
A Chapter 13 bankruptcy is a repayment plan that is generally completed between three and five years. The owner is required to pay the bankruptcy trustee each month a set amount of money, which is distributed to the owner’s creditors. The association is generally a secured creditor and is paid most, if not all, of what is owed to it under the owners bankruptcy plan.
What if an owner fails to pay assessments after bankruptcy is filed? Prince explained that bankruptcy filing only protects the owner from collections existing debts owed at the time the owner filed bankruptcy. If the owner fails to pay assessments that accrue after bankruptcy is filed (post-petition assessments), the association can file a motion in the bankruptcy court asking the court for permission to pursue collections on the post-petition assessments. This is commonly called a motion for relief from stay. Unless the owner cures the post-petition arrearage by paying in full, the motion is generally granted and the association must pursue its remedies in state court.
Once someone advises the association that he or she is represented by an attorney, is it advisable for them to continue contacting the individual, or do associations need to just deal with the attorney? Attorneys have ethical obligations not to communicate with a party that the attorney knows is represented by an attorney. There is no like requirement in the law for an association; the association can continue to contact the own- er. However, more than one Illinois court has criticized associations for not communicating through the owner’s attorney. Thus, the association should rely on its attorney to communicate with the owner’s attorney.