Publications

Collecting Delinquent Assessments

The board of directors of an association is just like the board of any other business in the sense that it must maximize revenues and control costs. Since assessments are an association’s primary source of revenue, a board must be conscientious about making sure everyone pays on time. This is why it is important for a board to have a strict collection policy in place in order to deal effectively with delinquent owners; one that provides the association with the quickest and most cost effective way of recovering the unpaid assessments, costs and fees, and in compliance with State and Federal law.

In establishing a collection policy, a board should work closely with its property manager and the attorney. First, one must keep in mind that:

No two cases are alike.
For every rule there is an exception.
The faster you attack a problem, the quicker the result.
Frequent communication is essential.
Payment plans and work outs for first time delinquents are strongly encouraged.
Never send partial payments back unless they prejudice your case.

It is crucial that accounts be followed up promptly, in order to stay one step ahead of a mortgage foreclosure. Once the mortgage lender files suit and completes the foreclosure, the association will needlessly have to write off a bad debt. That is why it is recommended that after a delinquent has received one or two notices, the matter should be referred to legal counsel.

First, in accordance with the Federal Fair Debt Collection Act, you must notify a delinquent that they have 30 days from the date of the first notice to demand verification (a breakdown, although litigation can commence during the 30-day period). A board should consider allowing delinquents to make arrangements for payment. At this early stage, a payment plan will generally have the account cleared up in a very short period of time.

There are some attorneys that refuse to accept less than full payment. To adopt this policy will reduce an association’s effectiveness. If an association takes a hard line the first time an account is delinquent, it will probably have difficulty throughout the processing of the file and may force the delinquent to default on their mortgage. A payment plan for a "first-time" delinquent will usually result in cooperation and end the problem. Please note that accepting a payment plan does not mean that you accept less than 100 cents on the dollar, only that it can be paid back over time.

In order to commence collection proceedings, a tract book search (mini title search) should be ordered to verify ownership, mortgage lender(s), suits pending, other lienholders, etc. The cost is charged back to the delinquent. Once the tract book search is received, a 30-day notice to terminate possession can be sent, which begins the eviction process.

A lien should also be prepared and recorded against the property in order to cloud the title in the event of a sale or refinance of a mortgage and to protect the association’s interest in case of a bankruptcy and/or foreclosure.

If all these efforts to collect the back assessments are unsuccessful, then the board’s policy should provide for an eviction. An action in forcible entry and detainer (eviction) can be filed after the 30-day notice has expired and payment is not received. The defendants must be brought within the jurisdiction of the court by being served with a copy of the complaint and summons. A court date is selected about 30 days after the first filing date.

If the owners have disappeared or are avoiding service, then the case must be continued an additional 21 days in order to do a notice by posting or file an alias summons. If the case proceeds on a notice by posting, the association can obtain possession of the unit, but will not be able to get a personal money judgment against the delinquent.

Once the final court date arrives, most of these cases proceed as a "default" because the debtor rarely shows up. The court will then enter an order terminating the owner’s right of possession of the unit and award it to the association.

If the unit owner is still occupying the unit, the court will issue a "stay" on the eviction for a minimum of 60 days before the Sheriff will evict them. (There are some judges who insist on longer "stay" dates and sometimes an association will have to wait up to 120 days.)

If the unit is leased out by the owner, the association can demand that all future rents be paid to the association by the renter, or the Sheriff will evict the renter.

Once the unit is vacant, the association secures possession by changing the locks, renting the unit out and collecting rent to be applied against the delinquency until the unit owner pays in full or the association is contacted by the mortgage lender, who is demanding possession after a mortgage foreclosure. Lenders or real estate brokers should not be allowed to take possession until they produce a copy of a recorded deed or agree to pay assessments.

If an association is renting out a unit, it can enter into a written lease for up to 13 months. The lease should contain a 30-day cancellation clause. However, units should not be leased out if the mortgage lender has already purchased the unit at a Sheriff’s sale. When an association is renting out a unit, it is important to be in constant communication with legal counsel.

The entire eviction process can take a minimum of three months if all the factors are in place and the unit has been abandoned, or six to seven months if the unit is still occupied by the owner and they refuse to cooperate. However, it must be pushed along quickly in order to avoid losing out to a foreclosing mortgage holder.

MORTGAGE FORECLOSURE

The lien of the first mortgagee is superior to the Association’s assessment lien, which means that if they foreclose and there are no other bidders at the sale, the lender will probably purchase the unit and the Association’s lien is wiped out. Usually, the only chance of recovering the assessments is by renting out the unit after an eviction (see above).

It is crucial that any notices pertaining to a foreclosure be sent to legal counsel immediately. Associations that choose not to use their attorney as their registered agent can lose thousands of dollars if they are not diligent in promptly forwarding all foreclosure paperwork. The association’s attorney can file an appearance, answer, etc. in the foreclosure to protect the association’s interest, since the association is a defendant in a lawsuit.

Once the foreclosure is completed, the lender is only obligated to begin paying assessments from the first day of the month following the foreclosure sale. They do not have to pay any past due assessments from before that date.

If all goes well, an association can collect enough rent, while monitoring the foreclosure, in order to break even. If the lender gets title before an association can collect all of the back assessments, any deficiency can be lost unless you can locate the owner and execute on a monetary judgment. Unfortunately, many people who lose their homes in foreclosure disappear. Secondly, they often file a Bankruptcy. . .

BANKRUPTCY

An association’s assessment lien on the property is a non-dischargeable obligation, which means it must still be paid. If the debtor files a Chapter 7, the lien is still in effect unless there is a foreclosure. If the debtor files a Chapter 13 or debt reorganization, he must continue to pay current assessments, but the outstanding balance can be paid over a period of time. Most plans run 36 to 60 months. Often the debtor does not pay current assessments, so a petition must be filed with the court to allow an eviction and to collect post-petition assessments. The association should be named as a priority creditor in order that it is paid off in a more expeditious manner. However, a large number of Chapter 13's fail, and once dismissed, collection can commence.

Finally, if the debtor files bankruptcy (Chapter 7) after a foreclosure, the association must write off the balance.

In conclusion, there are many intangible factors that one cannot count on, such as debtors hiring attorneys to defend the case, counterclaims, extenuating circumstances at the time of purchase, bookkeeping errors, lost payments, etc.

The procedures outlined are for the majority of cases to expeditiously collect payment on the majority of cases. The most important factors that create an effective collection policy are the prompt turnover of delinquents to legal counsel, the reasonableness of the board at the initial stage, frequent communication between the account manager and the attorney, and most of all, understanding the process.

If your association would like more comprehensive details regarding the collection process, please call our office for our free pamphlet "The Art and Practice of Collecting Delinquent Assessments."