By Andrew Christensen, Attorney
The dischargeability of home owner association dues is complicated and often misunderstood. It turns out that many times past due HOA fees may be discharged in bankruptcy.
There are several misconceptions about discharging HOA dues that are common among both homeowners and attorneys. It is commonly thought that HOA dues run with land, and are not dischargeable in bankruptcy. Another related misunderstanding is that even if HOA pre-petition dues may be discharged in bankruptcy, they still must be paid in the future when the house is sold because they run with the land and have a special secured status by statute.
These misunderstandings can be resolved when it is understood that the assessments are not the same thing as the covenants. The Covenants, Conditions, and Restrictions (CC&Rs) contain a covenant that is a promise to pay the assessments each month they become due. This covenant to pay the assessments is a separate and distinct thing from the actual assessment, which is the dollar amount of fees imposed each month. The covenant in the CC&Rs runs with the land and can never be removed, but the assessments are regular debts that can be discharged in bankruptcy under a certain set of rules. The truth is that past due HOA arrears are dischargeable in most cases.
The Davis-Sterling act is the source of California law that controls HOA assessments. That law states that monthly dues assessed by the HOA are personal unsecured debts of the homeowner at the time the assessments are made. (Cal. Civ. Code § 5650). If you fall behind too far on your HOA dues, the HOA may file a lien against the property. (Cal. Civ. Code § 5675). The debt becomes secured against your property only once the lien is recorded. This lien does not have any special priority status. (Cal. Civ. Code § 5680). An HOA lien is subject to the standard priority rule that liens are prioritized by the date they are filed. So at the time the HOA lien is recorded, it is last in line.
Past due HOA assessments that are unsecured may be discharged in chapter 7 and chapter 13 bankruptcy. This is because there is no exception to discharge for pre-petition HOA dues in the Bankruptcy Code. As long as you file your bankruptcy case before the HOA records a lien, then the past due amounts are wiped out.
If you plan on keeping your home, you must pay all the future assessments each month after your case is filed. This is because the covenant in the CC&Rs to pay monthly assessments runs with the land and still exists after your case is filed. The HOA still has the right under the covenant in the CC&Rs to impose post-petition assessments every month and those must be paid if you are keeping the property. However, they cannot collect any of the pre-petition arrears that are discharged in bankruptcy.
If the HOA has filed a lien against your property, then that lien can be treated like all other liens in bankruptcy. This means that in chapter 13 bankruptcy if your property is underwater you can file a motion to avoid the HOA lien which will strip the lien from your property, and then the past due arrears will become dischargeable general unsecured debts. But if your property has equity that secures the HOA lien, then you may use chapter 13 bankruptcy to pay the past due amounts in the plan and cure the default. This is the only reason for paying HOA arrears in a chapter 13 plan.
However, HOA liens cannot be stripped in chapter 7 bankruptcy. So if you file chapter 7 and the HOA has a lien, then you must eventually pay the past due amounts secured by the lien or they may foreclose on the property.
If you plan on surrendering your property because you no longer wish to live there, then there are additional considerations. If you file chapter 7, then you must continue to pay post-petition HOA dues until the property is sold or foreclosed. This is because there is a special rule in the Bankruptcy Code that prevents the discharge of post-petition HOA dues in chapter 7 until you are legally off the title to the property. (11 U.S.C. § 523(a)(16)). This is the most problematic issue related to HOA dues.
The common problem is that a homeowner will stop paying the mortgage and HOA dues, move out of the house, file chapter 7 to surrender the property, but then later receive notification from the HOA that they are liable for a large debt for all the fees that came due after the bankruptcy but before the foreclosure. This is a terrible burden on homeowners. In this situation, generally the easiest solution is to stay living in the property after the bankruptcy case and pay the post-petition HOA dues until the foreclosure takes place. Then you may move out of the house after the foreclosure sale. HOA dues are almost always less than what it would cost to pay rent somewhere else during that time.
The other option to avoid post-petition liability for HOA dues on a property to be surrendered is to file chapter 13 bankruptcy. Section § 1328(a) controls what debts are excepted from discharge in chapter 13, and § 523(a)(16) is not included. This means that the exception to discharge for post-petition HOA dues does not apply to a regular chapter 13 discharge. So if you want to surrender your home and move out before the property is foreclosed, you may file chapter 13 bankruptcy and you will not be liable for post-petition assessments that become due after the bankruptcy but before the foreclosure. This rule was upheld in the Oakland Bankruptcy Court in 2010 by Judge Leslie Tchaikovsky in the case of In re Kelly, case number 09-42376.
Discharging post-petition HOA dues in chapter 13 only works if you actually surrender the property by moving out. Bankruptcy cannot be used to remove the CC&Rs themselves from the property, so if you keep the property, you have to pay the future dues. This rule was explained by a court in Washington that held that if you file chapter 13 and you keep the property, then you must still pay the post-petition HOA dues. In re Foster 435 B.R. 650 (B.A.P. 9th Cir. 2010). This case explains the difference between assessments and covenants. The covenant to pay runs with the land and cannot be removed by bankruptcy, and the homeowner must pay post-petition assessments if they keep the home. It is important to note that the Foster case only addresses the situation where a debtor keeps the home. It does not address discharging post-petition dues when the property is surrendered, and therefore this case does not change the rule that post-petition HOA dues are discharged in chapter 13 when the property is surrendered.
In reality, HOA assessments are essentially just like every other debt subject to discharge. We have successfully stripped many HOA liens in chapter 13 and discharged the pre-petition dues for our clients who are keeping their homes.
Summary of the rules governing HOA dues
- HOA dues are a personal unsecured debt of the homeowner at the time the dues are assessed. Cal. Civ. Code § 5650.
- HOA assessments become secured only when the HOA files a lien. Cal. Civ. Code § 5675.
- The lien is not entitled to special priority. Priority determined by the first in time rule. Cal. Civ. Code § 5680.
- Pre-petition, unsecured HOA dues are dischargeable in chapter 7 or 13 because there is no exception to discharge.
- Exception to Discharge: § 523(a)(16): post-petition assessments are not dischargeable in chapter 7 or chapter 13 hardship discharge as long as the debtor has a “legal, equitable, or possessory ownership interest.” Debtor is liable for post-petition assessments in chapter 7 until the debtor is off the title. (usually foreclosure or short sale).
- Post-petition HOA dues are dischargeable in chapter 13 if the debtor surrenders the property because § 523(a)(16) does not apply to regular chapter 13 discharge under 1328(a).
- Post-petition HOA dues are not dischargeable in chapter 13 if the debtor keeps the property because the CC&Rs run with the land and this covenant to pay is part of property ownership. (see In re Foster, 435 B.R. 650) This covenant is the “HOA’s right to impose post-petition assessments pursuant to a recorded declaration of covenants.”
- HOA liens are avoidable in chapter 13 under § 506 if the property is underwater.
- The assessed HOA dues do not run with the land because assessments are separate from the covenant to pay.
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