The Lender Foreclosed and The Owner Has Not Paid; Is Your Association Leaving Money on the Table?—The New Community Association Paradigm

By David Swedelson, California Condo and HOA Legal Expert and Community Association Attorney

I came across an interesting article from a law firm in Florida (by attorney Lisa Magill with Becker & Poliakoff) that addresses the fact that after a bank forecloses, many boards are writing off the debt without considering all of the association’s collection options.

Yes, it is true that trying to collect from some delinquent owners may be a waste of time. But a board should be cautious in making that assumption without knowing if the homeowner has or does not have money or other assets. Boards should consider evaluating collection options.

As Magill states in her article: “While many owners who lose their units in foreclosure cannot pay, it is important to remember that a unit owner is personally liable for all unpaid assessments that are owed to the association when a bank forecloses. The association may seek to collect the balance on the account from the former owner. More and more, people who do have money and other assets make choices to abandon properties because there is no equity. If there is a possibility that an owner has assets to satisfy a judgment, the [association] should consider taking action against a former member to collect those unpaid assessments.”

While many owners have no money or assets, and that is why they are allowing their homes to be sold in foreclosure, many owners are making a conscious decision to let the property go because of its distressed value. I recently saw the new Tom Hanks/Julia Roberts movie Larry Crowne. In the movie, Hanks’ character is rebuilding his life and is back in college taking an economics course. There is a scene where he walks into his lender (after they had earlier refused a loan modification), and he hands over the keys to his home, telling the bank employee that he has made a strategic decision to let the house go. Hanks tells the banker that he is giving his home back to the bank because he owes more on the house than it is worth. He was talking about a strategic default – according to Wikipedia: A strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.

As Magill correctly points out: “Many associations are thinking short-term instead of long-term when they decide to forgo pursuing a money judgment for [what the defaulting owner owes the association] as a result of foreclosure…”

Yes, there are costs related to collection. If the association doesn’t already have a lawsuit pending, it will need to file one. But, as an alternative, small claims court is an option. Depending on what court the association decides to file its lawsuit in, there are attorneys’ fees, filing fees, costs associated with service of process, etc. If the association already has a lawsuit pending, most of those costs have already been expended – so why not continue to pursue the balance against the former owner?

A judgment can be recorded as a judgment lien (called an Abstract of Judgment) in each county that the delinquent owner may now or in the future own property. In California, that judgment is good for 10 years and is renewable in additional 10 year increments. During that time, if the delinquent owner, now a judgment debtor, tries to buy/finance another property, and/or obtain refinancing, the judgment lien will require that they first clear up that judgment. And the association can recover the amount of the judgment plus accrued interest at 10% per year.

While the judgment debtor / former owner may not have sufficient cash or other assets at this time, there is the possibility that they will have money in the future. And if the judgment debtor has assets in another state (many people bought property in other states as an investment), the association can seek to have the judgment entered in another state and pursue collection efforts there.

What can the board do to evaluate its options? An asset search may help discover assets. Complete searches cost approximately $850, depending on what assets are being investigated.

If the board does not want to incur attorneys’ fees, as referenced above, consider a small claims lawsuit. While the maximum recovery for an association is currently $5,000, an association can waive recovery in excess of that amount and at least obtain a judgment for $5,000.

California community associations should consider their collection options after a bank foreclosure – otherwise, the board may be leaving money on the table.

Note: SwedelsonGottlieb does handle collection lawsuits on an hourly basis and we also assist associations in filing and serving small claims lawsuits, in which case we will assist boards and management with an outline of what to present to the court in terms of documents and testimony. Call or email David Swedelson at for more information.

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