Page 5 - Chicago Cooperator Spring 2019

EVERYTHING FROM A (ACCOUNTING SERVICES) TO W (WINDOWS). (Sorry, no zebra trainer this year.) THE COOPERATOR EXPO 2019 WHERE BUILDINGS MEET SERVICES STEPHENS CONVENTION CENTER, ROSEMONT — WEDNESDAY, MAY 8, 10-3:30 FREE REGISTRATION: CHICAGOCONDOEXPO.COM CHICAGOCOOPERATOR.COM THE CHICAGOLAND COOPERATOR — SPRING 2019 5 QUESTIONS & ANSWERS Legal Q A& When an Owner Who Owes HOA Fees Is Now Bankrupt Q What can be done if a unit owner who has not paid his or her maintenance for a year – and owes the association $30,000 – has now declared bankruptcy? How does the association get its money? —Concerned Stakeholder A “Th e short answer is that an association may not get paid on the arrearage, or at least not all or even most of it,” says Mark Rosenbaum, an attorney with the Chica- go fi rm Fischel & Kahn. “An owner who has gone bankrupt is oft en in foreclosure as well, which will further complicate things. And if the unit is underwater with the mortgage, the situation becomes even worse for the association. “My descriptions of the eff ects of bankruptcy will be a very simplifi ed anal- ysis and will relate only to Illinois law as aff ected by the Bankruptcy Code. Bank- ruptcy is a very complicated area of the law. Th is article does not cover all situa- tions. “A bankruptcy case is started by the fi ling of a petition with the Bankruptcy Court. Th e mere act of the fi ling results in the entry of what is called the ‘auto- matic stay’ on all creditors (including the association). Th at means that no creditor can proceed against the debtor to collect on monies due, without the prior permis- sion of the Bankruptcy Court. Th e Bank- ruptcy Court takes the stay very seriously. A creditor who violates the stay will fi nd itself in front of the Court on a charge of contempt. Penalties can and will be as- sessed. So all collection eff orts must stop, including pending collection eff orts in state court. And if the unit is owned by more than one person, and only one of them fi les a petition, collection must stop against the other owner(s) as well. “Th ere are two types of bankruptcy petitions that an association usually sees: Chapter 13 and Chapter 7. “In a Chapter 13, the unit owner (known in Bankruptcy law as the ‘debt- or’) thinks he/she can pay the creditors, but simply needs additional time to pay. Th e debtor submits a payment plan to the court, which may approve the plan. A plan typically extends the time for payments to be made to creditors, some- times for years. If approved, as long as the debtor is making the necessary payments under the plan, the association cannot pursue the debtor for collection on as- sessments or other monies due under the plan. A plan will typically pay secured creditors 100 percent of the debt due as of the date of fi ling. But a plan may possibly not require 100 percent payment to un- secured creditors. To protect its interests, the association must fi le a Proof of Claim with the Bankruptcy Court to evidence the debt it is owed and to show that it is a secured creditor. In Illinois, since the association has a lien on the unit for un- paid assessments and other charges (765 ILCS 605/9(g)(1)), and is thus a ‘secured creditor’ the debtor must typically agree to pay 100 percent of what the association is owed as of the date of fi ling, even if un- der the plan it takes several years to do so. So eventually, in most situations (see below for some exceptions) the associa- tion should get paid the balance that was due as of the date of the bankruptcy fi ling. “In a Chapter 7, things are diff erent. Th e fi ling of a Chapter 7 (or the conver- sion of a Chapter 13 to a Chapter 7) will result, if the debtor eventually receives a ‘discharge’ from the Bankruptcy Court, in the debtor having no further personal obligation to pay the arrearage. Th e as- sociation’s lien on the unit for the unpaid amount remains in place, but the associa- tion cannot sue the owner personally or enforce any existing personal judgment against the debtor for monies due as of the date of the fi ling. Under a Chapter 7, an association does not need to fi le a Proof of Claim unless the Bankruptcy Court notifi es the creditors (including the association) to do so. “Under both Chapter 7 and Chapter 13, the debtor, under Bankruptcy Code Section 523(a)(16), must (in most cases) pay the assessments that come due aft er the date of fi ling. So if a bankruptcy peti- tion is fi led on June 10, the July (and aft er) assessments are still due from the debtor. “If a Chapter 13 debtor defaults on his/ her plan, or if a debtor fails to make post- fi ling assessment payments, the associa- tion can fi le a motion with the Bankrupt- cy Court to lift the automatic stay and ask to be allowed to proceed with collection as though the bankruptcy fi ling never ex- isted. If there is a clear default or failure to pay, such motions are typically granted. “Oft en a unit owner will fi le bankrupt- cy to stop (or at least slow down) a lend- er’s foreclosure action. It is my experience that, once a bankruptcy petition is fi led, lenders very quickly make a motion to the Bankruptcy Court to lift the automatic stay to allow the foreclosure to restart/ proceed. Th ose motions are very oft en granted. So a bankruptcy usually doesn’t slow a foreclosure down very long. If the unit goes to foreclosure sale, the result is oft en that the lender is the only bidder at the sale, and equity in the unit is ef- fectively wiped out. While Illinois has a 6-month ‘superlien’ statute that allows an association to collect of up to 6 months of assessments (in some circumstances) and the association’s legal fees and costs incurred during the debtor’s ownership of the unit (765 ILCS605(g)(4) and (5)), those monies are only payable by a 3rd party buyer (not the foreclosing lender). So if the lender completes the foreclosure and takes title, the association will have to wait for the lender (now owner) to sell the unit, which could take months (or lon- ger), before the association will be paid the superlien amounts. “If the unit is, during the bankruptcy process, sold to a 3rd party buyer, and there is equity in the unit, the association can get paid all (or at least some part of the arrearage) at closing from the equity (aft er the 1st mortgagee is paid-by statute, the 1st mortgagee always has a claim on proceeds of a sale which claim is ahead of the association). If there is a 2nd mort- gagee too, and if proper notice to the 2nd mortgagee has been given under the Il- linois Condominium Property Act, then the association may be able to claim at least part of the equity ahead of the 2nd mortgagee. In essence, assuming the sale takes place, the fact that a bankruptcy case exists will not, ordinarily, aff ect the association’s right to enforce its lien by getting paid at the closing. “If the unit is sold to a 3rd-party buyer during the bankruptcy process, and there is no equity in the unit, then the eff ect of the sale will be that the association loses its lien on the unit, and it becomes a mere continued on page 15