In these recent times of financial insecurity, Community Associations need to be vigilant and pro-active in the monitoring and collection of their assessments from homeowners. In the past year, the number of homeowners who have gone into collection for non-payment of assessments has significantly increased, while foreclosures and bankruptcies are at record levels. Unfortunately, these factors are only bad news for associations.
It is the Board’s duty to not only manage the Association, but also to oversee the collection of assessments from the homeowners. Assessments are the lifeblood of an Association, as finances are necessary to manage and operate the Association. Assessment payments are used for important line items like insurance premium payments and professional fees, as well as snow removal, lawn maintenance, exterior maintenance and the replenishment or establishment of reserve accounts.
In these recent months, due to the volatility of the financial markets, more and more homeowners are finding themselves with financial difficulties. This is partially due to many homeowners taking advantage of the low interest rates, or non-existent interest rates in the case of new automobiles, to make purchases of larger, more expensive items, including home repairs, new vehicles, vacations, and other items. These situations are pushing more and more homeowners into bankruptcy and/or foreclosure and, at the very least, forcing homeowners to choose between making the mortgage payment to their lenders and making their assessment payments to the Association. Unfortunately, more often than not, it is the Association’s assessment payment that goes unpaid on a regular basis.
Homeowners understand that their most harmful “threat” from creditors is their mortgage lender. Homeowners understand that the lender has as lien against their home and that, if their mortgage is not paid, the lender will file a mortgage foreclosure action, forcing the sale of their home at a foreclosure sale. Homeowners also understand that if their home is sold at a foreclosure sale, they will not get market value for the property, and they will most likely lose any equity they may have in the property.
What homeowners do not seem to understand is that ignoring the Association obligations is equally as detrimental to their credit. When homeowners fail to pay their assessments owed to an Association, the Association has several options available to it to force the collection of those amounts, including the filing of a breach of contract lawsuit; the recording of a lien; and the filing of an forcible entry and detainer action (eviction) against the homeowner, seeking removal of the homeowner from the premises.
The Illinois Code of Civil Procedure, Forcible Entry and Detainer Section, as well as the Association’s Declaration and the Illinois Condominium Property Act, if the Association is subject to the Illinois Condominium Property Act, all provide that a Community Association can utilize the remedy of eviction to remove non-paying homeowners from their units. The Association has the right, once the homeowner has been removed, to rent the unit out to a third party tenant and collect rent in an effort to reduce the debt owed to the Association.
In order for Associations to keep a handle on their debt, the Board of Directors needs to closely monitor the assessments which go unpaid on a monthly basis. Either the Board of Directors should be reviewing the financial information on a monthly basis or, if professionally managed, the management company should provide the Board of Directors with a monthly report, indicating the number of homeowners, as well as the amount of unpaid assessments, so that the Board of Directors can decide what action, if any, they are going to take. Once a homeowners has gone delinquent for two (2) months, that is, they have missed two (2) monthly assessment payments to the Association, that homeowner should be “turned over” to the Association’s attorney for collection action. If an Association allows the homeowner to go more than two (2) months delinquent without taking action, this could prejudice the Association if and when that specific homeowner goes into mortgage foreclosure.
Due to the Association’s Declaration, as well as the Illinois Mortgage Foreclosure Act, mortgages which are “first lien” on the property take priority over the Association’s lien for unpaid assessments. This means that, in the event of a mortgage foreclosure, the first lender will get paid 100% in full prior to any other creditor receiving any amounts out of the proceeds of the mortgage foreclosure sale. A mortgage foreclosure action takes approximately ten (10) months to complete and, therefore, it is imperative that an Association proceed as soon as possible to collect unpaid assessments from its owners. As a forcible entry and detainer action takes approximately six (6) to seven (7) months to complete, the time frames that would be available to an Association to rent out a unit prior to the lender taking that unit away from the Association is somewhat limited and is shortened by every month the Association waits to put the homeowner into collection.
When a homeowner is turned over for collection, typically the first correspondence sent to the homeowner is a collection letter which must comply with the Fair Debt Collection Practices Act. This correspondence notifies the homeowner of the name of the creditor and the amount owed to that creditor. This letter also gives the homeowner thirty (30) days within which to dispute the debt. This dispute time period does not mean that the Association must wait an additional thirty (30) days before it proceeds with collection activity. It only requires that the creditor provide the debtor with information regarding the debt, prior to proceeding with collection action.
The next step in the collection process would be the issuance of a Thirty Day Notice And Demand For Possession. This is a statutory requirement under the Illinois Forcible Entry and Detainer Act and one which gives the homeowner a thirty (30) day time period in which to bring their account current. The Thirty Day Notice and Demand for Possession must be sent by certified mail, return receipt requested, to the last known address of the homeowner. Once the Third Day Notice has been mailed and the thirty day time period for repayment is past, the Association can file an eviction action against the homeowner.
Once an eviction action is filed, the Sheriff must serve the homeowner with a copy of the Summons and Complaint, notifying the homeowner that a lawsuit has been filed against them and notifying them of the specific time and place where they are to appear in court. If the homeowner does not appear in court, the Association would be entitled to a Judgment by default. However, if the unit owner does appear in court and does not agree with the amount owed to the Association, the matter would then be set for trial. At trial, the witness from the Association would appear to testify as to the amounts owed and after hearing all of the evidence, the court would enter a Money judgment against the unit owner, as well as an Order for Possession, in favor of the Association.
Another pitfall for the Association is when the unit owner files bankruptcy. There are two (2) types of bankruptcies that a unit owner would file, either a Chapter 13 or a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is a situation where the unit owner’s liabilities outweigh their assets and the court basically cashes out the unit owner’s assets and pays the liabilities in some prorate share. Usually, most creditors will be repaid some amount from the bankruptcy; however, they would be paid a nominal amount as against the total outstanding debt.
With a Chapter 13 bankruptcy, the homeowner is asking the Bankruptcy Court for a fresh start for all of their post-Petition obligations. A post-Petition obligation is something that accrues after the filing of a Bankruptcy Petition. In a Chapter 13 bankruptcy, the homeowner must stay current with their post-Petition payments and come up with a repayment plan on all pre-Petition payments. Under the current bankruptcy laws, a debtor has up to five (5) years in which to repay all of their creditors. If the debtor remains current in their post-Petition obligations and pays their pre-Petition obligations according to the payment plan, as approved by the court, the creditors can take no collection action against them.
In conclusion, because of the many situations where an Association’s lien can get extinguished, either in a mortgage foreclosure situation or a bankruptcy, and the uncertainty of today’s financial situation, Associations must continually review homeowners’ accounts and take action as soon as possible in order to decrease the amounts they will be writing off as bad debts from uncollectible homeowner accounts.
Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collections, landlord/tenant issues, and property tax appeals. We have four office locations, serving hundreds of clients and thousands of communities throughout Illinois, Indiana, and Wisconsin. Our attorneys are also licensed in Arizona, Florida, and Missouri.
If our law firm can be of assistance, please call 855-537-0500 or visit www.ksnlaw.com.