Academy/Collections & Delinquencies
Bankruptcy
The automatic stay stops your board's collection cold, but it doesn't erase every dollar the owner owes.
When an owner files bankruptcy, federal law's automatic stay stops all collection instantly: no demand letters, no lien enforcement, no foreclosure, without a judge's order. Assessments owed before the filing are often discharged in Chapter 7. Assessments due after the filing must still be paid, for as long as the owner keeps the unit.
The automatic stay stops you the second the case is filed
There is no grace period and no notice requirement on the board's side. The moment an owner (or their attorney) files a bankruptcy petition, a federal automatic stay goes into effect automatically, without a court order, and it applies to the association exactly as it applies to any other creditor.
The stay reaches "any act to create, perfect, or enforce any lien against property of the estate" and "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case."
Source: 11 U.S.C. § 362(a), Cornell Legal Information Institute
That covers demand letters, recording a new lien, continuing a foreclosure already in progress, or even calling the owner to ask about the balance. A board that keeps a collection action moving after learning of a filing is violating a federal statute, not just being pushy. Stop everything and let the association's attorney decide whether to seek relief from the stay.
What the discharge wipes out, and what it doesn't
A common misread is that bankruptcy erases the whole relationship between the owner and the association. It doesn't. What happens to the debt depends on when each assessment became due, and which chapter the owner filed.
Assessments the owner already owed before the filing are typically unsecured debt, discharged along with the owner's other pre-filing debts in a Chapter 7 case. Assessments that come due after the filing are a different animal entirely: the Bankruptcy Code carves them out of the discharge.
"for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor's interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit"
Source: 11 U.S.C. § 523(a)(16), Cornell Legal Information Institute
In plain terms: while the owner keeps the unit, post-filing assessments still have to be paid, and they survive the discharge. Chapter 13 changes the picture again. This exception "does not apply in Chapter 13 cases except in the rare instances when a debtor... is granted a so-called 'hardship discharge.'" (11 U.S.C. § 523(a)(16)). Treat "the owner filed bankruptcy" as the start of a question, not the end of one: which chapter, and which assessments, before and after the filing date.
What your board should do right now
The moment management or the attorney learns of a filing, freeze all collection activity on the pre-petition balance and route the file to counsel. Keep tracking new assessments separately as they come due; those are not covered by the stay in the same way once the case is underway, and the association can generally keep billing for them.
Which chapter the owner filed, how quickly the board can seek relief from the stay to keep enforcing its lien, and what happens to the lien itself once the case closes all vary by state and by the specifics of the case. Don't guess at any of it from a general rule; get the account's specific facts in front of the association's attorney.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A board learns an owner filed Chapter 7 last week, but a demand letter was already queued up, so it goes out anyway. What's the legal problem?
An owner's Chapter 7 case closed a year ago, but they still own the unit and keep accruing new monthly assessments. Can the association collect the newer charges?
A board member hears that Chapter 13 protects post-filing assessments from collection the same way Chapter 7 does. Is that accurate?
Sources
- 11 U.S.C. § 523(a)(16), exceptions to discharge for membership association fees, Cornell Legal Information Institute
- 11 U.S.C. § 362(a), automatic stay, Cornell Legal Information Institute
Collections & Delinquencies
Once you know what survives bankruptcy, the next question is what your lien is actually worth against a first mortgage. See Lien priority.
Which chapter the owner filed, how quickly the board can seek relief from the stay, and what happens to the lien once the case closes all vary by state and by the specifics of the case.