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What Happens When a Condo Owner Files Bankruptcy?

It is hard for homeowner’s associations and condominiums to keep their cash flow running on full these days.  Their reserves depend solely upon unit owners’ ability keeping their financial obligations in the form of monthly assessments.  These assessments are paid by all owners for the community’s common expenses such as trash, lawn maintenance, utilities and building repairs.  When a unit owner falls behind on his or her dues this can cause a major setback for the HOA.  If several owners fall behind or if the funds are mismanaged (that is another blog), then the HOA can be subject to liens, law suits and receivership.

In our current economic climate, I have had a number of HOA clients approach me when owners file bankruptcy.  I have also had indebted condo owners consult me for advice when they are knee-deep in unpaid condo fees and other debt.  Most lawyers will advise these debtors to file bankruptcy as if that will solve their problems. But the learned attorney who is well-versed in all things condominium related will know better.  Here is the quick and dirty on how HOA and condominium liens are treated in bankruptcy:

Chapter 7 Cases

If the HOA or condominium has not filed a lien against the unit for the unpaid condo fees, then the debt is unsecured and dischargeable.  If the HOA has filed a lien prior to the owner filing bankruptcy the debt is secure and cannot be discharged.

Chapter 13 Cases

In cases where the unpaid condo fees are secured by a lien, they receive special treatment under Chapter 13.  In cases where the unit itself is under water, the lien may not be secured by the value of the property. Thus, “lien stripping” may be an available remedy for a home owner. For example, if the condo is valued at $130,000 when the owner files bankruptcy but the mortgage is $150,000 and the lien for condo fees is $10,000, the condo lien is unsecured and can be “stripped off.”  This means the owner will be completely freed of the lien.  In another scenario, however, the owner may still be on the hook. Say the condo is valued at $130,000 and the mortgage owed is $125,000 and the lien is $10,000.  There is enough equity ($5,000) to secure part of the lien and thus, the lien can be “stripped down” to the amount of remaining equity on the home.

In any case, the amount that the HOA or condominium collects will in many cases be determined by state law.  In Maryland, HOA liens are given a priority over first deeds of trust up to $1200.00.  This means that regardless of whether there is a mortgage, an HOA can collect up to $1200.00 in unpaid assessments (this amount does not include legal fees and collection costs). In the District of Columbia, HOA liens have a 6-month priority over first deeds of trust. This means that the first six months of unpaid condo fees due the HOA will be given priority over the mortgage holder.

It’s a hard knock life for many HOAs and condominiums when owners don’t pay their fees.  The key to effective collection is to start early and try to work with owners who may be experiencing genuine financial hardship but can pay under some type of arrangement.

If you are an owner or a representative from an HOA or condominium and need advice on a collections matter, please feel free to drop me a line at or by phone at (202) 507-6313.