At some point, just about every community association will have a delinquent owner who files for bankruptcy. And while a bankruptcy filing is often interpreted as meaning that the debt has become uncollectable, it does not necessarily mean the end of the road for creditors, especially homeowners associations. There are special provisions for homeowners associations in the Bankruptcy Code that may help an association, assuming the association has recorded a lien, and collection of the delinquent assessments may still be possible. Having an attorney who is familiar with bankruptcy law involved at the outset of the case can drastically improve an association’s chances of recovering the money it is owed. Some bankruptcies are quick and easy. Some are not. Some start out looking like they will be quick and easy, and then things change. This article is about the ones that change when a delinquent homeowner’s bankruptcy is converted from one type of bankruptcy to another.
The date that a bankruptcy is filed is often referred to as the “petition date”. The debt (in this case, the delinquent assessments) owed on and before the petition date is called the “pre-petition” debt. This pre-petition debt is what is subject to discharge in some bankruptcies. “Discharge” means that the owner is released from the obligation to pay the discharged debts. Any assessments that come due after the petition date, i.e., the “post-petition” debt, are not subject to discharge in the bankruptcy. However, ambiguity arises when a bankruptcy starts out being filed under one chapter and is later converted to a bankruptcy under another chapter. This is most common when a bankruptcy is filed as a Chapter 13 and is subsequently converted to a Chapter 7. The questions then become: What debts are discharged? Is the petition date still the date the bankruptcy was filed, or is it now the date of conversion? Obviously, this is an important distinction.
This issue came up recently when a competing assessment collection service (not our firm’s affiliate Association Lien Services) insisted that the homeowner was not liable for the assessments which arose between the filing date and the conversion date after the discharge order was entered. Although at first glance their reasoning seemed sound, and the language of the discharge order appeared to support their position, they failed to consider that the provisions upon which they relied were informational only and not a binding part of the order. Clearly, that collection service did not anticipate every situation which can arise. Here is where they went wrong.
Section 11 USC 348(b) of the Bankruptcy Code states:
“(b) Unless the court for cause orders otherwise, in sections 701 (a), 727 (a)(10), 727 (b), 1102 (a), 1110 (a)(1), 1121 (b), 1121 (c), 1141 (d)(4), 1201 (a), 1221, 1228 (a), 1301 (a), and 1305 (a) of this title, ‘the order for relief under this chapter’ in a chapter to which a case has been converted under section 706, 1112, 1208, or 1307 of this title means the conversion of such case to such chapter.”
When we distill out the legalese and omit the section numbers, we are left with a fairly simple principle: upon conversion from one chapter of bankruptcy to another, the date of conversion becomes the petition date, not the date the bankruptcy was originally filed. The new petition date is referred to as the “order for relief”. This would apparently support the position that a delinquent homeowner may not be personally liable for assessments which came due between the filing date and the conversion date after the discharge order was entered. However, since we are talking about assessments levied by a homeowners association, we need to consider all of the specific laws that are applicable.
It is true that in many situations, section 348(b) above would create a change in the “order for relief” date from the original petition date to the new conversion date, and this would affect the debts being discharged. However, this analysis ignores the provisions of section 11 USC 523(a)(16) of the Bankruptcy Code which states:
“A discharge [under specified sections of the bankruptcy code] does not discharge an individual debtor from any debt 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, such corporation, or such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.”
As you can see, the same language referring to the “order for relief” date is referenced in section 523(a)(16) above; however, the expressly enumerated code sections cited in the language of section 348(b) do not refer to section 523.
Therefore, the “order for relief” date as used in section 523 is not changed after the conversion pursuant to section 348. The “order for relief” with respect to assessments levied by a homeowners association refers to the original petition date, not the conversion date, so long as the debtor (the delinquent owner) or the trustee has a legal, equitable, or possessory ownership interest in the property.
In short, as related to delinquent homeowners association assessments, the conversion date does not matter. The homeowner will be personally responsible for paying all post-petition assessments from the date the bankruptcy was filed, as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in the property. This is true even if the case is later converted and even if a discharge order is entered.
If you require additional information on the subject of bankruptcy and how your association can deal with owners that have filed same as part of the assessment collection process, please contact SwedelsonGottlieb today.