Coping With Arrears When Residents Fall Behind

Coping With Arrears

 The foundation of any properly run condo association or co-op building rests on  residents paying their monthly maintenance fees on time and in full, with no  delays or delinquencies. However, thanks to the lingering effects of the  recession causing job losses and financial uncertainty—especially here in the Chicagoland area—many buildings and associations are feeling the pinch of late and/or missing  maintenance payments. Many owners are also unable to cover the cost of special  assessments to fund much-needed capital repair and improvement projects.  

 Hard Times vs. Hardball

 Most real estate industry pros have seen the effect that non-payment and arrears  have on buildings and HOAs, and say that it’s a problem that has surged in some buildings in recent years, for an array of  reasons.  

 According to Tom Skweres, regional vice president of ACM Community Management in  Downers Grove, the reasons for non-payment vary. “It can be because of financial hardship. They've lost their job, or have other  expenses that have come up—but it’s mostly employment.”  

 Residents going into arrears deliberately is another issue that can make for  serious administrative and budgeting headaches for boards, says Jeffrey Cagan,  president and CEO of Chicago-based Cagan Management. In these cases, “It doesn’t have anything to do with financial hardship—it’s because they're angry with a board member about something.” Fortunately, says Cagan, “It doesn’t happen a lot. We manage what I consider established condominiums and co-ops,  so we don’t find that as a big problem. Conversions with a lot of renters in the building  can be different, but when it’s owner-occupied, we don’t find a big issue with it.”  

 When to Act

 Regardless of the reason for an owner's arrears, says Skweres, “The budget still has to be met—and the unit owners in good standing have to bear the expense of the unit owners  who are not paying. Hopefully they would collect the money back, but in the  short term everybody bears that burden.” Multiple and ongoing arrearages can have a trickle-down effect across an entire  association, limiting the funds the community has available for both regular  maintenance work and important capital projects.  

 Acting quickly, and putting that action in writing is key, says real estate  attorney James A. Erwin, founding partner of the law firm of Erwin & Associates LLC in Chicago. “Too often, boards wait too long before taking action. Board members have a  fiduciary obligation to manage the fiscal health of the association. We  typically counsel boards to send a first notice promptly after the first month  of delinquency and to then initiate formal action (via a 30 day notice) after a  second month of delinquency. Waiting any longer does not generally benefit the  association.”  

 Cagan agrees. “The quicker you move, the quicker you get a result. As far as grace periods go,  it’s up to the board.” The typical grace period written into most governing documents is 30 days, says  Skweres. The typical grace period before incurring late charges is 15 days.  

 The time a board or association will wait before initiating collection  procedures will vary, depending on what is written into the community's bylaws.  There are also restrictions as to what can be charged with respect to state and  federal laws.  

 According to the pros, initiating a lien on the unit, then either trying to go  to small claims court for judgment, or forcing a lender to start a foreclosure  action is normally the typical course of action. If the unit is rented to a  third party, the association can try appointing a receiver to get rent paid  directly to the association. If not, forcing the bank to start a foreclosure  may be their only option. Doing so is extremely expensive, running into the  tens of thousands of dollars—but if a resident is paying his or her mortgage and not the monthly condo  charges, then commencing legal proceedings is the board’s strongest way to bring the matter to a head, once all other efforts have been  exhausted.  

 The Role to Play

 While the management of co-ops and condos is their niche, in recent years  management companies have also had to become experts in the field of debt  collections. Many boards and residents don’t recognize that debt collection is a whole separate business and expertise, and  one that is secondary to most property management companies. Similarly, a  community's accountant or financial advisor is also largely uninvolved in  collecting arrears. It's the association's legal counsel who is crucial in  pursuing proper collection and/or foreclosure.  

 Experts say that an accountant doesn’t become a key player in any collections action and most often it will be the  property manager, who the board will be relying on for advice, and guidance,  with respect to collection matters. Once the legal team gets involved, they  will report to the property manager on the status of the legal proceedings.  

 A Helping Hand

 If a resident is open and proactive in communicating with their board about a  temporary financial hardship from the beginning, a board may agree to make a  move that is both a business decision and shows that they are good neighbors,  giving the resident a payment plan that keeps the association solvent and eases  the pressure on the individual as well. “I would think a payment plan that lasts six months is the most prudent for a  board to take,” says Skweres. “Obviously, the board realizes that these are neighbors they're dealing with, so  in most cases they are willing to work out a six month payment plan.”  

 Whatever terms the board and owner agree to, “It just needs to be documented properly,” says one attorney. “It’s in the board's interest business-wise because taking the next steps for  collection requires a lot of time, money and effort, which you may not get  back. Also, it’s in your best interest as a neighbor, because you are buying goodwill.”  

 Others feel that payment plans or other easements are just bad business, plain  and simple, and discourage boards from adopting such measures. “While granting a grace period to owners who have encountered financial hardships  may seem like the moral or empathetic way to respond to assessment  delinquencies,” says Erwin, “the board represents the interests of the association and, as such, must enforce  assessment collection against all owners alike. Owners who do not have the  financial resources to maintain their accounts current need to consider other  alternatives, whether those be selling the unit, renting it out, borrowing  funds or other means of resolving the debt.”  

 “In other instances,” Erwin continues, “particularly with smaller associations, as an offset against an owner's  delinquency, a board will allow a delinquent owner the opportunity to perform  maintenance work or other tasks for the association that would otherwise cost  the association money. This can work but—again—it's not typically a recommended solution because of the formalities and cost  that must be undertaken (a contract must be drawn up and approved by the board,  etc.) and the risky precedent that could be established and challenged by  future owners who want to enjoy this same benefit.”  

 On the administrative side, in order to staunch the outflow of cash and lack of  inflow, Skweres says, “Boards can put a lien on the property, and then evict the owner and take  possession of the unit, renting it out until the delinquency is satisfied. At  that point, they would turn it back over to the unit owner.”  

 Keeping it Fair

 The Fair Debt Collection Practices Act applies at the beginning of a proceeding  and requires advanced noticed of 30 days. Collecting a past-due assessment  requires sensitivity, and it’s important that the association does not violate the owner’s rights. The FDCPA requires that when the association writes to an owner to  collect late assessments, it must state that the letter is an attempt to  collect a debt, any information the debtor gives will be used to collect the  debt, the amount of the debt that has accrued and the name of the association,  and that the owner has 30 days to dispute the debt’s validity in writing. If a debt collector violates the act, the FDCPA says he  or she may be liable for damages to the debtor, such as emotional distress or  slander.  

 According to Erwin, “In Illinois, associations operating under either the Illinois Condominium  Property Act or the Illinois Common Interest Community Act have a statutory  lien for delinquent assessments. To enforce recovery, condominium associations should start by sending the owner  a 30 day notice of the arrearage and intent to institute legal action pursuant  to the Forcible Detainer Act. That action allows the association to sue to evict the owner and to take  possession (not ownership) of the unit and then rent it out to recover  delinquent assessments. A common interest community association may also initiate an action under the  Forcible Detainer Act, but only if its governing documents expressly permit  such action. Otherwise, those associations are limited to foreclosing their lien, which is  costly and time consuming, or initiating a breach of contract claim, which may  not be efficient if the owner is uncollectible.”  

 Final Thoughts

 Fortunately, the days of rampant arrears may be on the wane. “It’s obviously a problem if someone can’t pay their costs,” says Cagan, “and that was an issue four or five years ago, when a lot of buildings were being  converted and a lot of buildings were struggling—but we don’t see that too much today.”  

 If your building is among those still struggling to collect delinquent common  charges however, you are faced with essentially three choices: Enter into a  payment plan with the defaulting owner, sue for money damages, or foreclose.  Whichever method is chosen, it’s important to do it in a timely, formal manner to maximize the recovered funds  and minimize the impact on residents in good standing.     

 Keith Loria is a freelance writer and a frequent contributor to The Chicagoland  Cooperator. Associate Editor Hannah Fons and staff writer Christy Smith-Sloman  contributed to this article.  

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  • Patrick Shaughnessy on Thursday, August 1, 2013 5:51 PM
    As a 10+ year plus board member I support Mr. Erwin's hesitation to extending grace periods. I might also add that if a board extends this courtesy to one resident it must do so for EVERY resident. Where does the board draw a line? What/who defines financial hardship? What if the person doesn't follow-through on their payment plan, then what? Better, I feel, to avoid the situation and stick to existing processes and not allow the practice. Also, the monthly assessments ARE the payment plan. At the beginning of an association's year each owner owes assessments and are allowed to pay monthly. I do not believe an association should offer a payment plan for the already-in-place payment plan. If they do, how much interest should they charge? An excellent article, Mr. Loria! Thank you!
  • I understand the law about evicting a nonpaying owner and renting out the unit to get the unpaid assessments. In theory. In actuality, the unit may not be in good enough condition to rent to a desirable tenant. Then, how do you get a short-term tenant (if the amount owed is say, $2,000)? And what if this tenant won't leave after the unpaid amount is collected? It seems that there will simply be more hassle and possibly eviction of the tenant.
  • My 6 unit condo association obtained a Order of Possession for a unit in our building against the owner for non-payment of HOA fees back in 1996. Since then, we have been renting the unit out and paying the unit's HOA from the proceeds. The account set up for the surplus rent money has accumulated enough funds for the unit's HOA fees to be paid for the next 20 years. Do we, the condo association, have to continue renting out the unit or can we just keep it empty and continue drawing the HOA fee from the rent account? Also, if we do not want to continue with this strange situation, do we have any recourse to force a sale on this unit even though the HOA fees are up to date because we have used the rent money for it? The evicted owner has no mortgage on the unit and continues to pay the property tax on time, but she has made no movement to try to remove the court order from 1996! She also does not respond to any attempts from us to contact her to try figure out what her intentions are. We are sick and tired of managing her unit but don't know what legal recourse we have since she is technically not in arrears with her HOA fees.
  • Lauren Peddinghaus on Thursday, May 7, 2015 12:07 PM
    This article indicates that the typical route for collections is placing a lien on a unit and then moving to foreclose the lien. Since this is the Chicagoland Cooperator and we're dealing with IL Condo law, it should be noted that Illinois has a specific remedy for addressing delinquencies that is used much more widely - particularly in a maket in which an owner might owe more on their mortgage than the property is worth. The association can file a forcible lawsuit and take possession of the unit, allowing them to evict the owner and rent the unit to recover delinquencies (or, if rented, order the tenant to deliver their rent to the association rather than the owner/landlord). This is not an option in most other states, making it fairly unique to Illinois.
  • My HOA,has threaten to confiscate my unit. I withheld / escrow my June assessment as soon after I learned they refused to communicate or cooperate with my Ins. Co. Who was to cover other loses. This isn't in the By-laws. They've been very secretive and lacks integrity. They perform like a "just us club". The HOA recently extended their positions to 2 yrs. Owners have not been allowed to review contracts, Ins. claim, payments etc... My Units suffered terrible water damage roughly 5 mos. ago, due to their neglect and lack of integrity. Contractors said, my restoration should've been 3-5 days. I've asked several times about this. The President's words are not consistent. The claim was filed late February funds received shortly afterward. It's July. My unit still lies in despair. I suspected and suggested fraud. The reprisal was the threat to diminish my credibility. Do I have the right to put my Assessment in Escrow because of their poor judgement and lack of responsibility?