HOA boards can spend too much or spend money that the association does not have yet, resulting in a bankrupt HOA. Bankruptcy can also stem from underfunded reserves. When multiple homeowners turn delinquent, the HOA can encounter a lack of sufficient funds. In addition, the association can incur large unexpected expenses that its insurance policies do not cover. Homeowners associations also experience fraudulent activity , much like businesses. Embezzlement or internal fraud can go undetected for years without proper financial management and monitoring, ultimately leading to bankruptcy.
Homeowners in an HOA community pay assessments to keep the association going. Otherwise, the HOA can take the necessary steps to obtain the money. This means the association can sell personal property to make up for sizable debts. Keep in mind, though, that this course of action is not something HOAs can just take any time.
The HOA must follow certain steps in order to do this, so it is best to check with your attorney first. When the board improperly manages funds, homeowners can claim negligence of fiduciary duties.
An individual board member or the board as a whole can be on the receiving end of a lawsuit. While HOA bankruptcy is an option, it should not be the first option for most homeowners associations.
There are other possible courses of action that an HOA can take over filing for bankruptcy. Before immediately jumping to bankruptcy, consider the following alternatives:. When the HOA funds are mismanaged, the association could face bankruptcy.
One of the first signs of trouble to look out for is when the HOA starts withholding information from members. A homeowners association can file for Chapter 11 bankruptcy. This type of bankruptcy allows the organization to reorganize their funds and management systems. During the Chapter 11 process, the HOA managers will stay in office, but any major decisions will have to be court-approved.
The HOA will work with the courts to come up with a repayment arrangement and will be under the trustee of the court until the organization can be financially independent again. When the HOA goes into bankruptcy, collection of the property is delayed so the community can retain its assets. With the assistance of an attorney, an HOA may reorganize for the purpose of repaying debts and restoring the financial health of the organization.
Bankruptcy payments are submitted to the Trustee of the USA. Cloud-based solutions are the next step for association management software , and it can let the leaders know who is handling certain monetary tasks. An HOA can reject the current leases and contracts. This can directly or indirectly affect the residents who live in the community. Any additional fees that accrue after you file for bankruptcy, like other post-bankruptcy debts, will not be discharged.
Even if you surrender your home in bankruptcy, new HOA fees will continue to accrue while you wait for the bank to foreclose. Just like your property tax, you'll remain responsible for the HOA fees until the title changes from you to the bank. If the homeowner's association isn't paid for the fees out of the proceeds of the sale of the property or if the association doesn't want to wait for payment, it might be able to sue you personally for any post-bankruptcy HOA fees assessed to you while you were on the title.
Keep in mind that both of these options can result in substantial tax debt. Before pursuing any course of action, you should consult with your accountant or a tax attorney. To learn more about foreclosures and short sales, see Foreclosure. If you intend to keep your home in a Chapter 7 bankruptcy, then you should probably treat the HOA as you would any other bank holding a mortgage on the property and plan to pay HOA dues that are owed before and after you file bankruptcy.
Even if your liability for past dues gets discharged, the HOA could foreclose on your home if the HOA has a lien on your home for the dues.
Falling behind on HOA fees comes at a cost because the HOA will assess late charges and, in many cases, attorney fees—and they could exceed the balance of the HOA assessments and dues.
You'll want to check your state laws because they vary on whether the HOA can collect attorney fees and other charges from you. As a general rule, if the HOA by-laws or articles allow attorney fees, late fees, and other charges, then you'll be on the hook for those amounts.
Your state's statutes might also give the HOA authority to charge you these fees. But that does not mean this right is open-ended. Usually, HOA attorney fees must be "reasonable. See, Your Home in Chapter 7 Bankruptcy , for more.
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