Rude Awakening: Homeowners Assessment Obligation to HOA After Bankruptcy or Lender Foreclosure

Homeowners who have gone through a bankruptcy or a lender’s foreclosure are often surprised to learn that they still owe unpaid assessments to their former homeowners association.

HOA Assessments are the Personal Obligation of the Homeowner.

Homeowners associations charge assessments to fund their operations. The assessments are the personal obligation of the owner of the lot or unit for the entire duration of his/her ownership. Thus, even if a homeowner abandons his/her property and stops paying the mortgage payment, he/she remains obligated to pay the HOA assessments. Even if the lender chooses to delay its foreclosure for many months, the homeowner remains responsible to pay the HOA assessments.

HOA Assessments also are a Lien on the Property.

According to most Declarations of Covenants, Conditions and Restrictions (CC&Rs) and Arizona statutes (the Planned Communities Act and Condominium Act), HOA assessments also are a lien on the homeowner’s lot or unit. The HOA lien arises in the CC&Rs and, generally, no notice of lien needs to be recorded in the Pima County public records at the Recorder’s office. Nevertheless, it is prudent for a Board of Directors to authorize the recording of a Notice of Lien to assure that the property is not sold without the Association’s lien being paid and released; or that the homeowner has not filed for bankruptcy relief; or that the homeowner is in default of the mortgage resulting in a Notice of Trustee’s Sale. According to the Rules of the Arizona Supreme Court, only attorneys or certified document preparers can prepare a notice of lien.

Depending on the terms in the CC&Rs, the homeowner may be liable for:

the unpaid assessments
late charges
reasonable costs of collecting (for example, attorneys’ fees)
interest

Not only will an assessment lien cloud the title to the homeowner’s property, thereby hindering his/her ability to sell or refinance, but also the assessment lien can be foreclosed and the property sold at a Sheriff’s Sale (an auction on the courthouse steps) to satisfy the debt. The opening bid at the Sale is the Association’s credit bid for all of the amounts it is owed, including attorney fees and Sheriff’s fees.

Foreclosure of HOA Liens

In Arizona, an HOA assessment lien is foreclosed judicially. This means that a lawsuit in filed in Superior Court for a judgment in the Association’s favor for all amounts due under the HOA lien. The Defendants are all persons or entities whose lien on the property will be extinguished by the Association’s lien foreclosure. Most CC&Rs and the Arizona statutes contain a provision making the HOA lien subordinate to (lower priority than) a first mortgage even if the mortgage was recorded after the CC&Rs were recorded that established the assessment lien. Thus, the first mortgage lien will remain on the property following the HOA foreclosure. A second mortgage, on the other hand, would be extinguished by the foreclosure of a senior HOA assessment lien. An Arizona HOA lien also is subordinate to liens for property taxes and other governmental assessments or charges against the lot or unit.

Limitation on HOA Foreclosures

Arizona’s Planned Communities Act and Condominium Act [A.R.S. §33-1807 and §33-1256] provide that an assessment lien cannot be foreclosed unless the owner has been delinquent in the payment of assessments secured by the lien, excluding reasonable collection fees, reasonable attorney fees and late fees, for a period of one year or in the amount of $1200 or more, whichever occurs first. These statutes also provide that: (a) monetary penalties and associated fees are not part of the HOA assessment lien, and (b) a lien for unpaid assessments is extinguished unless lien foreclosure is initiated within three years after the full amount of the annual assessments becomes due.

Post-Bankruptcy

The purpose of a bankruptcy case is to relieve the debtor of his/her debt and give the person a “fresh start.” In general, all personal debts that arise before the bankruptcy filing are discharged. However, because the debtor’s homeowners association assessment account also is a secured debt (i.e., it is a lien on real estate), the assessment lien is not extinguished in bankruptcy so long as the debtor continues to own the property. Therefore, the homeowner’s personal obligation to pay assessments might be discharged in a bankruptcy [pursuant to 11 U.S.C. 727]; however, the property that is the subject of the secured HOA lien remains liable for the debt. A homeowner could finalize a bankruptcy in 2013, retain ownership of his/her dwelling unit; sell the unit in 2015 and find out that he/she needs to pay the homeowners association before the property can be conveyed free and clear of liens to its new owner.

Written by: Carolyn B. Goldschmidt
November 2013