Obviously, an association needs assessments to be paid, preferably on time, in order to operate. There are many undesirable consequences of having too many delinquent homes and/or unpaid assessments. A community with an abundance of homeowners in arrears could be declined for a capital improvement loan when needed by a community to perform necessary or major repairs or replacements. The Federal Housing Administration (FHA) 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 David J. Byrne, the first step in the process of collecting delinquent assessments from a unit owner, generally, is a letter from the association. This is a formal notice demanding that the unit owner pay his or her outstanding assessments, which are detailed within the document. This notice also warns of impending legal action if the debt is not paid by the specified deadline. Such notice, by virtue of the governing documents, may be a prerequisite for the association to have other rights. Depending on the situation, the association’s letter may have a variety of other contents. Association counsel may thereafter send a type of notice.
The standard option available if the demand letter was unsuccessful in recovering the assessments owed and if any other efforts, such as the denial of certain privileges, were also unsuccessful is a money judgment lawsuit or a foreclosure of the lien.
In a non-cooperative context, an association enjoys the right to record a lien against the particular property and/or unit in the amount of any unpaid common charges and, perhaps, other charges. Via any number of judicial access points, the association’s action can include a money judgment claim and a foreclosure claim. Byrne further explained that a money judgment is a personal judgment against the record owner, which is the basis of attempts to try to execute on the person’s assets, such as bank accounts and real property. On the other hand, a foreclosure is designed to seize and/or change ownership of the property so that it can be rented, sold at a sheriff’s sale, or both.
Determining If an Account Is Likely to Be Collectible, With Respect to Condominiums and Homeowners Associations.
How can an association determine if an account is likely to be collectible? “There are ways to know when amounts are more likely to be recovered than not,” Byrne explained. “For example, if a house is worth more than the balance of the underlying mortgage, there may be equity, in which it’s more likely than not that there will be a recovery.”
On the other hand, Byrne added, if the house is worth less than the balance of the underlying mortgage, the house is empty, and the owner is missing and/or judgement-proof, there is not much likelihood of the account being collectible (from the owner); that is, unless the association uses the empty unit to try to generate revenue by renting it out, which is the path that Byrne suggests.
“It’s very difficult to know ahead of time if an amount is recoverable. The problem associations have is that the amounts will constantly accrue; balances get larger. Even if you believe an account is uncollectible, you still have to take action because the balance will simply rise and keep rising, inevitably allowing a person to continue to live in the unit and/or enjoy the ownership of it without ever paying the assessments,” Byrne explained.
What if the association deems collection doubtful? According to Byrne, as long as a home is owned by a person rather than a bank, and it has not been sold through a sheriff’s sale, it is likely a mistake to deem those unpaid amounts 100% uncollectible.
However, if a home is sold through a sheriff’s sale, the previous owner is no longer obligated to pay at that point, and thus, his or her balance will no longer rise. “That’s when the association should take a hard look at writing off a balance,” advised Byrne.
Can associations embarrass their residents by publicly disclosing their delinquencies? “No properly operated organization can ever intentionally embarrass anybody,” said Byrne. “On the other hand, an association can let its homeowners know the factors that go into the calculation of a common charge, including the amounts that are not paid by owners. For example, the association can show the homeowners who owes money and how much,” Byrne explained. “In some states,” Byrne added, “it is required that an association do that.”
If the purpose of doing this, however, is to embarrass, shame, or punish someone, then it is not acceptable and may constitute a fiduciary duty breach. It is acceptable if the purpose is to educate the homeowners. “Every homeowner has the right to know all the aspects that go into calculating the common charge amount,” said Byrne. In fact, an association, by law, must keep and make certain financial records; of which records identifying owners and balances would be included.
A judicial foreclosure is a foreclosure via the court system. It entails recording a lien and filing a foreclosure complaint, just as is done with a mortgage. “When you don’t pay your mortgage, the bank often files a foreclosure complaint and takes the home away from you,” Byrne explained. A judicial foreclosure must be performed by the court, and a court must enter judgement and authorize the home’s sale.
Once an association determines that it is going to pursue a money judgment and/or a home’s foreclosure, a complaint must be filed. If for some reason the unit owner cannot be reached, is deceased, does not accept service, or evades service, alternative means of service will have to be considered, Byrne said. Once the complaint is served, Byrne added, there is a period of time during which the owner can file an answer. “If the owner doesn’t file an answer within that period of time, then the association can file initial papers for the purpose of getting a judgment. Once the judgment is entered, the association is now entitled to direct the sheriff to sell the unit and/or attempt to execute on certain assets,” said Byrne. A sale may then be scheduled and held with the buyer from that sale becoming the unit’s new owner.
Debt collectors have a variety of obligations in relation to communication with debtors. “Debt collections laws, for the most part, are not applicable to property management companies and are never applicable to associations themselves,” Byrne noted. “Laws like the United States Fair Debt Collections Practice Act (FDCPA) are applicable to ‘third party’ debt collectors; people or entities hired for the purpose of collecting a debt, but they’re not applicable to the person to whom the debt is owed,” he added. Byrne also said that the regulations/limitations on communication are to be followed by the attorney who has been hired by an association. With regard to associations themselves, Byrne said that communications should be undertaken in the best way possible to serve the purpose of recovering dollars owed and to get people to pay common charges moving forward.
Byrne noted that, for the most part, it does not make sense for associations to seek recovery of unpaid common charges via a collection agency. It may make sense though, according to Byrne, when the unpaid common charges are due from someone whose ownership has been taken away through a sale. The post-sale unit is now paying common charges every month going forward, but the previous owner is carrying a balance. “That owner debt perhaps should be sent to a collection agency. Other than that, depending upon the agency’s terms, it’s may be a breach of fiduciary duty to do so,” Byrne noted.
Byrne said that when hiring a collection agency that bases its compensation upon a “contingency” of some sort, the nature of the agreement is for the association to accept a smaller portion of the total amount owed. He said that, if an association is hiring a collection agency to deal with a situation where a unit’s prior owner still carries a balance, this is a debt that the association has already deemed to be uncollectible. Therefore, an association may be more willing to turn it over to a collection agency and to share a percentage of the collections amount with them. The association is aware that the debt would have been a loss for it anyway, so “losing” 40% of any money recovered is still 60% more than it would have gotten otherwise.
“Setting up a repayment plan is certainly a preferred approach if there is an owner who’s prepared to do the right thing and sign something, especially if the balance is relatively minor,” Byrne said.
With regard to setting up a repayment plan, Byrne offered some tips. First, the plan should be in writing to protect the association. The agreement should also be focused not only on the amount of money owed as of the date of the agreement, but also on the amounts that have not yet accrued. “The agreement needs to account for ongoing common charges,” Byrne said.
“The agreement should provide for the owner remaining current on all common charges that accrue subsequent to the agreement. It should provide that failure to do so will give the association grounds for a judgment for the amounts that are then due. This will allow the association to shortcut the collection process if the owner fails to pay accruing common charges,” Byrne said.
“The Fair Debt Collection Practices Act is a federal law that protects people from unconscionable collection processes. It applies only to third party debt collectors, including lawyers,” said Byrne. He explained that once the FDCPA is applicable with regard to a given debt, there are a variety of controls on the debt collector. Associations are not governed by the FDCPA, as the association itself is not a third party debt collector. Therefore, associations do not have to comply with the FDCPA with regard to setting up payment plans or pursuing debtors, he added. Byrne concluded, “recent judicial decisions in various circuits have rendered decisions in support of the concept that management companies are not ‘debt collectors,’ for the purposes of FDCPA, so long as those companies adhere to certain guidelines.”
According to Byrne, once an association is granted a money judgment, the association can use this tool to seize and/or execute upon a delinquent unit owner’s assets. If the court case resulted in a foreclosure judgment, he said that the association can buy the unit through a judicial sale and then rent it out (in the typical situation that the unit enjoys no equity). Other strategies and options may be available depending upon the circumstances.
According to Byrne, to execute an asset means to take or seize it. He said that execution is the physical act of enforcing the judgment. He explained that garnishments and levies are types of executions. Current law precludes a creditor’s execution upon (garnishment of) a debtor’s wages. Current law also allows for an execution on a bank account.
According to Byrne, a “judicial sale”, “sheriff’s sale” and/or “statutory sale” divests an association’s lien for common charges (i.e., extinguishes it). However, state law may provide for a certain amount of the common charges due from the prior owner remain, and survive the sale. Those amounts will be due from the sheriff’s, judicial and/or statutory sale purchaser. As of the date of publishing, New York is not one of those states.
According to Byrne, in most cases, short sales are not in the association’s best interest. “Short sales, by their very nature, are relevant to units that enjoy no equity. Associations are better off carrying out foreclosures and renting units to generate rental income to pay amounts that are due to cover ongoing, accruing common charges,” Byrne said. “Although a short sale will ultimately result in a paying customer going forward, it will almost always inevitably result in not recovering all money owed prior to the sale. A ‘short sale’ that will result in the association’s receipt of full payment (but the lender’s loss) should be accepted.” “Of course,” Byrne said, “a board of managers must consider and analyze each particular situation on a case-by-case basis.”
It is not advisable to pursue delinquent owners who decide to walk away from their properties, according to Byrne. He said that, instead, an association should seize the unit via any number of strategies and rent it out. “A person who abandons a unit should almost never be sued personally,” said Byrne. “The chances of recovery are generally small.”
If the unit’s lender comes in once the association has already started the foreclosure, can the association discontinue it? According to Byrne, the association can discontinue its own foreclosure at any time, but he advised against doing so. He noted that even when a lender has begun its own foreclosure process, there is no guarantee, or law, that requires the lender to advance and/or finish.
Should the association move forward with its own foreclosure once the lender begins the foreclosure process? “The association should start its own foreclosure when it makes sense to do it. Typically, when a lender has begun a foreclosure, an association might be more hesitant to proceed with its own foreclosure. At the same time, the association might be interested in being more active and moving more quickly since the lender has demonstrated at least an interest in proceeding,” Byrne noted. There is no doubt that a judicial, sheriff’s or statutory sale purchaser must pay common charges upon completion of that purchase.
What are the pros and cons of foreclosing on a delinquent owner with the intent to rent out the unit to recoup association common charges? “All pros,” said Byrne. “By doing so, the association is actively protecting itself, preserving the unit, making the neighbors happy, and it has the potential to recover dollars that are due and that are becoming due every month.”
The redemption period refers to the period of time after a sheriff’s sale during which the owner has a unilateral right to undo the sheriff’s sale by paying the amount due on the foreclosure judgment, Byrne explained. In New Jersey, the redemption period expires in ten days.
An association’s best practice when it comes to its landlord duties is to follow the law, Byrne said. He added that some states have laws governing the obligations of landlords and suggested that associations become familiar with these laws and follow them. State law generally, expressly, empowers an association to “acquire” and “hold” real property.
If a lender comes in when the association is renting a unit, can it argue that there are no delinquent assessments that it must pay? “Maybe, especially if everything is paid that has accrued after the sale,” said Byrne.
What Is the Record Keeping Process During a Collections Procedure?
To sum up the collections options available to associations, after those informal efforts have failed, it generally comes down to what strategy is likely to be most effective and the status of the particular unit or home.
An association must identify all of the facts relevant to making the right decision and to ensure a successful outcome. An association should ascertain the unit’s status (occupied, empty, etc.). It should ascertain the unit’s value, the amount of the underlying mortgage and the status of that mortgage. Furthermore, it should ascertain the employment status of the debtor and the existence and nature of his or her assets.