Delinquent homeowners 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 could be declined for a capital improvement loan when needed, therefore preventing the community from performing necessary 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 dues 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. Depending on the situation, the association’s letter may have a variety of other contents. Association counsel may thereafter send such a notice.
Byrne noted that there are two options an association can pursue if the demand letter was unsuccessful in recovering the assessments owed and if any other efforts, such as the recording of the lien, were also unsuccessful. Generally, those two options are filing a money judgment lawsuit or a foreclosure of the lien.
In New Jersey, the association has to record a lien before it can foreclose on it. A lien is generally recorded whether a money judgement is filed or not. The “simultaneous” part applies more to the foreclosure and money judgement suit than it does the recording of a lien, Byrne said. According to Byrne, both actions can be performed simultaneously, although they usually are not.
He 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 wages and bank accounts. 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.
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, no account can be deemed 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 an assessment, 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 assessment amount, including the amounts that owners are not paying,” said Byrne.
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.
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 is ten days long.
Once an association determines that it is going to pursue foreclosure, a foreclosure complaint must be filed. If for some reason the unit owner is not accessible, is deceased, does not accept service, or evades service, then a foreclosure can generally be openly served via publication, such as by publication in a newspaper, Byrne said.
Once the foreclosure 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 foreclosure judgment. Once the foreclosure judgment is entered, the association is now entitled to direct the sheriff to sell the unit,” said Byrne. A sheriff’s sale is then 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 collection 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 assessments moving forward.
Byrne noted that, for the most part, it does not make sense for associations to sell unpaid assessments to a collections agency. It may make sense, according to Byrne, when an unpaid assessment amount happens to be owed by someone whose ownership has been taken away through a sheriff’s sale. The post-sale unit is now paying assessments every month going forward, but the previous owner is carrying a balance. “That owner debt perhaps should be sent to a collections agency. Other than that, it’s almost always a breach in fiduciary duty to do so,” Byrne noted.
Byrne said that when hiring a collections 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 collections 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 collections 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 assessments,” Byrne said.
“The agreement should provide for the owner remaining current on all assessments 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 assessments,” Byrne said.
“The Fair Debt Collection Practices Act (FDCPA) 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 statute, 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 the 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 sheriff’s sale and then rent it out (in the typical situation that the unit enjoys no equity).
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. Usually, common language provides that a garnishment is a wage execution, while a levy is a bank account execution.
According to Byrne, New Jersey law requires that liens be prepared by attorneys. A non-lawyer’s preparation of a lien could be deemed the “unauthorized practice of law,” Byrne said. The point in the debt collection process at which a lien is actually recorded depends on the association and its governing documents. “Associations should not wait to record liens,” Byrne urged. “Liens protect associations in the context of an owner’s bankruptcy and a delinquent owner’s attempt to sell or refinance. Liens should be aggressively prepared and recorded in my opinion,” he said.
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 assessments,” 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.”
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 small.”
In some instances, small claims court can be a viable option with regard to delinquent owners. “In some ways, it’s a very smart option because hiring an attorney is not required in New Jersey for small claims court,” Byrne said.
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 the foreclosure process 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.
When must a lender pay delinquent assessments? According to Byrne, under New Jersey law, a purchaser via a sheriff’s sale is not required to pay any assessments that accrued prior to the sheriff’s sale, except in some instances when six months’ worth of assessments must be paid.
What are the pros and cons of foreclosing on a delinquent owner with the intent to rent out the unit to recoup association fees?
“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.”
An association’s best practice when it comes to its landlord duties is to follow the law, Byrne said. He added that New Jersey has detailed laws governing the obligations of landlords and suggested that associations become familiar with these laws and follow them.
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 sheriff’s sale,” said Byrne.
According to Byrne, an association should have previously adopted policies relating to collections procedures readily available, and be sure that it is not authorizing actions contrary to them. Also, it should be sure that all accounting is correct.
To sum up the collections options available to New Jersey associations, it generally comes down to foreclosure vs. money judgment.
A foreclosure is an in rem proceeding, which is an action that focuses simply on the property and does not seek any personal judgment against the homeowner. A foreclosure judgment does not allow asset execution. “It’s a judgment simply used for taking the house away from the person,” Byrne said. He said that the process begins by recording a lien, though it is not necessarily the case that a foreclosure will follow from a lien. However, there is no foreclosure without a lien, added Byrne.
A money judgment, on the other hand, allows the creditor to take an individual’s personal assets, including money. Generally, it is not a vehicle to take the house, Byrne said.