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 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 huge 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. So how should this be done?
There are many ways to deal with delinquent homeowner assessment accounts, and various factors that need to be considered prior to taking any collection action. “First, you need to assess the situation of the owner and the property to make an educated decision on which route will be the most effective in recovering the balance,” said Michigan attorney Jeff Vollmer.
The process begins by performing a preliminary asset search to determine whether or not the account in question is likely to be collectible. “If we determine the owner is collectible, we generally pursue options that will result in a money judgment in favor of the association. Once a judgment is taken, we proceed to collect on the judgment by garnishing wages and bank accounts and exercising other collection remedies,” he said.
Vollmer said that if there is a doubtfulness of collection, or significant equity in the property, associations generally go down a route toward foreclosure. Whether to go about foreclosure by advertisement or by judicial means will depend on various factors. One factor is whether or not there are potential title issues involved. Additional factors are issues involving other encumbrances and liens, as well as priority issues. “If there are title issues or a multitude of competing liens, we may suggest a judicial foreclosure so all of those issues can be worked out in court,” he said.
There are two forms of foreclosure that can be pursued with respect to a community association lien provided “power of sale” language is contained in the condominium documents – which most of the times is the case. The following excerpts are from Vollmer’s firm, Makower Abbate Guerra Wegner Vollmer PLLC, and provide descriptions of the two.
Foreclosure By Advertisement: The first version that is possible is foreclosure by advertisement. This is entirely a statutory proceeding and is performed in accordance with the provisions of the mortgage foreclosure by advertisement statute. In this type of situation a notice of foreclosure sale is published in the legal news for four weeks prior to the scheduling of a sale date. That notice must also be posted by the local sheriff or court officer on the door of the property being sold. It is incumbent upon the party foreclosing to make sure that they have identified and notified all parties with an interest in the property. After the publication period, the sale is then held and it proceeds in the same fashion as outlined below for a judicial foreclosure. Assuming the association ends up with title to the unit for failure of anybody else to bid, the deed is subject to a six month redemption period similar to a judicial foreclosure – after which time the association can proceed to evict the occupant of the unit and either sell the unit or surrender the same to a party with a higher priority.
The major differences between a foreclosure by advertisement and a judicial foreclosure described below is the fact that there is no court proceeding required at the beginning of the process before the sale is held, as would be the case in a judicial foreclosure. Therefore, the cost of the judicial proceeding and the waiting period before commencing a foreclosure is saved. Unfortunately, unlike a judicial foreclosure, a foreclosure by advertisement can be attacked judicially at any time prior to the expiration of the redemption period. This would involve the filing of a complaint by a party with an interest in the property, claiming that the foreclosure sale should be set aside for any number of reasons related to irregularity such as failure of notice, imperfections in the posting and advertisement of the unit, or even counterclaims involving the assessments on which the foreclosure was promised. If such an action is filed just prior to the expiration of the redemption period, it has the effect of staying the expiration of the redemption and setting the case back to square one pending the outcome of the judicial challenge, which may take several months to over a year. An attack on the foreclosure sale after the fact is not possible in a judicial sale. Also, in the case of a judicial foreclosure, you get a personal judgment against the delinquent co-owner as well. With advertisement, the property is being used to satisfy the debt and you have effectively given up your right to take a money judgment against the owner .
Judicial Foreclosure: The second option is judicial foreclosure. While this option takes longer than a foreclosure by advertisement, and costs more, there is an advantage in this procedure because once the sale is held, it is final as the court that issued the judgment also issues an order confirming the propriety of the sale and its final effect. After the expiration of the redemption period, the sale cannot be challenged and the association can then proceed to have the unit vacated and either sell it or surrender it to a superior encumbrance.
The procedures leading up to the actual foreclosure sale are different in that the association commences a judicial foreclosure through the filing of a complaint with the circuit court. Depending on whether or not the defendant answers, by either a default motion or a summary disposition motion, the association obtains a judgment of foreclosure and also a judgment of personal liability upon the co-owner who owns the unit. Based upon the obtaining of that judgment, the association moves forward with the sale rather than just publishing the notice as in the case of a foreclosure by advertisement, except that the earliest that publication of the foreclosure sale can occur is 6 months after the filing of the lawsuit. Publication for a judicial foreclosure must occur for 6 weeks and notice of the sale must be posted in 3 public places in the County
Once the determination of which route to pursue is made, attorneys normally will inform the association and get their approval prior to commencing the process. “Usually, the first step is to send a demand letter to the responsible owners advising of the balance and warning of additional collection efforts if the delinquency is not cured,” he said. If they do not receive a response to the demand letter, the attorney will then file a lien upon the unit. If a response to the lien is not received, they will move forward on the path determined prior to starting the process.
Does it make sense for associations to go a different route and sell unpaid assessments to a collection agency? “ Maybe,” said Vollmer . “Collection agencies usually accept delinquent accounts on a contingency basis and percentages can vary.” He cautioned that if you are only referring accounts that you are reasonably sure you will never collect, it doesn’t cost you anything, so it doesn’t hurt. “If an owner is clearly collectible, the success of the collection agency will reduce the net recovery of the association. Instead of recouping the full balance plus costs and collection fees, the association only walks away with a percentage,” he said.
Another possible option for those seeking to collect delinquent accounts is Small Claims Court. If you have a debt that is collectible, filing in Small Claims Court is an option for boards or association managers to use to pursue the debt. An attorney would not do this on the association’s behalf. “Attorneys are not permitted to appear in small claims cases ,” notes Vollmer.
What are the proper means of communication with the debtor during the collections process? “We urge our clients to stop any communication with the delinquent owners or their representatives once we start collecting on an account,” he said. The primary reason for this is that once the collection process starts, the costs of collection are charged to the co-owner. Additionally, having only one party speaking ensures accuracy and accountability.
Also, in many cases associations would end up settling for less than the full amount due or agreeing to something they should never agree to. There is also the risk of inconsistency in communication with the debtor co-owner. “In order to avoid inconsistency on amounts owing, coordinating payment plan proposals and everything else that can come up in a delinquency, we like to serve as the point of contact, which then allows us to filter one message to the board and any management company.”
Are there ways to set up repayment plans with debtors who express an interest in doing so? According to Vollmer, there are many ways to do this. However, he cautioned not to accept or even ask for payment plans that are unrealistic. “Entering into a payment plan that fails the first month wastes everyone’s time and delays recovery. Both the association and the owner need to be realistic about what payments are feasible,” he said. He explained that one of the biggest mistakes he sees associations make is setting arbitrary payment plans without looking at individual circumstances. “This is one situation where boards should be flexible ,” he said. “Payment capabilities are different for retirees on fixed incomes versus owners with full time jobs and no dependents .”
He recommended tailoring a plan that makes sense — one which would provide the debtor the ability to make the agreed upon payments. “At its core,” he continued, “the payment arrangement should not result in the owner falling further behind. That will only serve to delay the inevitable and put the association in a more precarious situation later on ”
Something additional to note regarding collection tactics: The Fair Debt Collection Practices Act, a piece of federal legislation, governs the collection of debts against consumers. “There are a lot of obligations placed on debt collectors under this law ,” Vollmer said, “and attorneys collecting debts for association clients are considered debt collectors and must comply with that statute.”
Must associations comply with the Fair Debt Collection Practices Act when setting up any payment plans or pursuing debtors themselves?
“An association attempting to collect its own debts is not subject to the Act, as it is not engaged primarily in debt collection. It is the attorneys, and sometimes the managers, who should be concerned about this law’s requirements, which apply to most forms of communication with the delinquent owner ,” Vollmer said.
Vollmer also recommended not engaging in any practice to attempt to embarrass the delinquent co-owner. “There are sizeable risks associated with publishing names and account information of delinquent owners. Boards should not engage in this practice ,” he said, “if there is an error , you could face a defamation claim for erroneously reporting that someone hasn’t paid a debt,” he said.
He pointed out that it doesn’t make sense to take this risk since, if someone can’t pay, embarrassing them won’t make any difference in their ability to do so.
Once a collection case goes to court, there are a number of different actions that can be taken to collect the debt. “Under Michigan law, a condominium association has the ability to sue for both a money judgment and the right to foreclose. That lawsuit must be filed in circuit court ,” said Vollmer. He explained that if you want to foreclose in any situation, unless you’re doing it by advertisement, you also need to go to the circuit court because they have sole jurisdiction to do that. District courts — and small claims courts are part of district courts — can only give you judgments for money. You can’t foreclose a lien in district court. Rather, you’re going to get a judgment for an amount due.
“A primary drawback of filing a simple money judgment in district court is that it only captures amounts owing as of the judgment date. As additional installments come due after the judgment, you have to go back to court, perhaps on multiple occasions ,” Vollmer said. That is the downfall of district courts. The limitation of jurisdiction in district courts is not usually a problem. Since the limit is $25,000, it would be unlikely for an association to allow a co-owner to become so deeply delinquent without taking action.
Another downside of district court is that it produces an unsecured judgment, which means that it’s dischargeable in bankruptcy.
There are three ways to collect on money judgments — garnishment, levy and execution.
Garnishment is the seizing of money due. Some examples of what can be garnished are loans due the debtor, bank accounts and wages . “With a judgment, you can garnish an entire bank account and 25% of the debtor’s wages ,” he said.
A levy is a seizure of personal property. “This document authorizes the court officer to seize personal property of value, and sell it to help satisfy a judgment. It is most often applied to cars, motorcycles or boats ,” explained Vollmer.
An execution is the same as a levy except it is on real property rather than personal property. “The execution would allow you to sell real property, other than the real estate in the community, to pay down the judgment ,” he said.
Vollmer explained that it’s not considered an unauthorized practice of law for someone to file their own liens. However, the problem with people who are not attorneys doing that is if they make mistakes — file for unjustified amounts or amounts in the future, or if they don’t follow statutes, such as Michigan’s, which says you can’t put any collection costs on your lien amount — they are going to make their lien attackable in court, and possibly even voidable, in court.
“In an extreme case,” he said, “you could be facing a slander of title claim for recording an erroneous or unjustified lien against the property. If you are going to adversely impact an interest in land, you need to know what you are doing or hire an attorney who does ,” he said.
“It depends on the preferences of the particular association. Most communities prefer to issue a demand letter before proceeding with a lien. Some communities like to start with a lien. If the lien is the first step, the ancillary attorney fees and costs will be higher. Although many delinquencies are cured upon receipt of an initial demand letter, some owners will not make arrangements to pay unless they see that their property interests have been impacted. Even if the association starts the process with a demand letter, it only needs to wait approximately five weeks before moving forward with the lien,” Vollmer said.
There are many different circumstances dictating the best route for collection. Furthermore, during the process, additional factors can alter the direction the process will take. Here are a few scenarios and factors that affect an association’s collection actions.
For example, is it advisable to go after delinquent owners who decide to walk away from their properties, particularly those owners who did a strategic default? Vollmer said that they determine whether or not to pursue a debtor who has abandoned the property after performing an asset report. If the debtors have assets, he said, yes, it is advisable to go after them. “If the balance exceeds a certain threshold it makes sense pursuing these owners because the chances of success are good ,” he said.
Vollmer stated that there are two classes of association debtors — those who can’t pay, and those who choose not to pay. “For those who can’t pay, there is no tool in the toolbox to force payment ,” he said. Since they cannot pay, there is nothing you can do that will enhance your ability to collect the debt. “As for those who choose not to pay, community associations, and particularly condominium association, have an assortment of remedies at their disposal to encourage payment ,” he said.
Another decision to weigh is whether to pursue foreclosures against delinquent owners or whether it is more advisable to allow banks to foreclose and assume the financial obligations. Vollmer explained that associations and their attorneys would not be able to obtain the necessary information to make that determination in any situation. “There is no rhyme or reason as to how and when banks decide to start their foreclosure. We have seen instances where the owner may be deceased, or the property may have been abandoned for a couple years, but still no foreclosure by the mortgage company,” he said. Internal bank matters are not something the association would be privy to.
Vollmer further noted that the association would not know if the bank was receiving a payout of federal mortgage insurance, for example, or if it has otherwise written off that debt so it is no longer carried on its books. “Unless the bank voluntary records a discharge of a loan it has written off, you are not going to be made aware of that situation ,” he said. He recommended that associations proceed with foreclosure even if there is a bank out there not being paid its mortgage payments. “Sitting idly by while the unpaid balance grows and the property continues to depreciate is not the answer. Sometimes you need to take action to get the property off center ,” he said.
If the bank comes in during the time that the association has already started the foreclosure, the association can always discontinue it. “Putting the bank on notice of the association’s foreclosure can sometimes accelerate the bank’s foreclosure. It may act as a wake-up call for the bank to say – ‘We need to do something with this property’,” he said.
Once the bank starts the process, at least in Michigan, there isn’t much point in the association moving forward with their own foreclosure. Not unless there’s an error in the process whereby the association has an argument that they’re entitled to a better priority than the bank is giving it. “In the rare situation where the association’s lien was recorded prior to the mortgage, you need to take action to assert your lien interest with the foreclosing bank,” he said. “Unless there is a bank error which impacts the association’s lien priority, it is unlikely you should involve yourself in a bank foreclosure, except to monitor the results of the sale and any potential overbid the association might claim as a junior lienholder .” The association’s priority, he noted, is set by statute, and they’re going to receive whatever is left over, if anything, in the order of their priority. “In the vast majority of cases there is no equity or overbid at the foreclosure,” he said, “so there is usually nothing to protect and the association’s lien is extinguished .”
However, aside from when a bank starts its own foreclosure procedure, Vollmer pointed out that another circumstance where he would stop collection efforts against a co-owner would be if that co-owner’s status had changed to the point where the debt had become uncollectible. ”From time to time, the life circumstances of the owner change. The owner may have started with a job and assets, but then lost that job and any liquidity ,” he said. . Alternatively, if the bank pays the sum due when it comes in, why continue to pursue the co-owner if you’ve been paid in full? These are examples of when to stop collection efforts. “Halting collection efforts is the exception, not the rule ,” he said.
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.
Foreclosed properties can become an eyesore for certain communities. Particularly in HOAs — lawns go un-mowed, weeds grow, paint peels, pipes freeze and cause leaks. How can associations get banks to handle maintenance issues on foreclosed properties?
“One option is to sue them for breaching the restrictions,” said Vollmer. He also said that some associations have self-help provisions that allow them to do whatever needs to be done maintenance-wise and to bill the unit. When you have that type of provision, he recommended sending one letter stating the repair or maintenance needs to be done in a specified number of days, and if the work is not done, the association should just proceed with the work and bill the unit. “Once the bank forecloses, the underlying mortgage is wiped out. The association should not be competing with other lienholders at that point, and if the banks are not going to take care of the property, do it for them and assess the costs,” he said.
There are also limits on the amount of past-due assessments lenders are required to pay. “Michigan laws does not afford condominium associations’ lien priority over foreclosing banks. However, the Condominium Act requires foreclosing banks to pay assessments from the date they acquire title to the property, which has been construed as the foreclosure date. Banks are responsible for paying assessments during the 6 month redemption period following a foreclosure, even if they do not have possession of the property,” said Vollmer. Anything prior to the date of the sale itself, he noted, cannot be recovered legally in the State of Michigan.
What are the pros and cons of foreclosing on a delinquent unit with the intent to rent the unit to recoup the association’s fees?
Vollmer said that this is often an option where you are not otherwise going to collect and somebody has a higher priority on the Unit that you do not wish to pay or that you believe exceeds its value. And in that case Vollmer does not see a downside of renting the unit.
“If the property is in good shape, and the association does not have to fix it up, it can generate rental income to not only offset the monthly assessment but help pay down the balance accrued by the former owner. Even 6 months of rental income is better than continued unpaid assessments during that time,” he said. He noted that this is especially true if there is a bank out there in the wings that has a mortgage that legally has a higher priority than the association. The one thing to be cautious of here is that you do need to act properly and professionally in your actions as a landlord. The association is advised to hire a professional to handle the landlord responsibilities.
“There are legal requirements for leasing real property boards may be unfamiliar with. It is important that all required disclosures are made and the lease does not overpromise to the tenant on the lease term,” said Vollmer. He noted that condominium association boards are not usually professionals in handling real estate or even homeowner associations for that matter. That’s why they hire managers. “If the association’s property manager is not capable of leasing the property, find someone who has experience in this area. Even though you may only be leasing the property for a short period of time, there are pitfalls associated with being a landlord including such issues like security deposits and municipal rental registrations,” he said. He further stressed that since real estate is a regulated industry, you need someone who knows what they’re doing.
If a lender does come in when you are renting such a unit, could they argue that there are no delinquent assessments they’re required to pay?
Vollmer explained that there are two types of association documents out there. There are those that have a specified manner in which payments are applied, and those that do not. If you have a provision that says that any money is applied to costs, expenses, and then assessments in the order of its delinquency, and you’re renting the unit as an association, you’re going to apply the money in the manner which that provision requires. This means that technically, even though you have rental income, that rental income may not be paying current assessments because there are still amounts to be paid from prior due assessments. “In those situations, if the bank forecloses during the term of the lease, we would argue that the rental income is being applied to unpaid assessments arising prior to the foreclosure, leaving the assessments accruing after the bank foreclosure as the bank’s responsibility ,” he said.
Unless the bank has a receiver, they will not be able to take your rent income. On the other hand, in cases where there is no application of payment language in the association documents, in Vollmer’s opinion, the association would need to pay the current assessment and then apply the rest to the back assessments that may be owed. In that situation, there wouldn’t be anything for the bank to pay.