We frequently receive inquiries as to whether dues and/or assessments from property owner associations (“POA” or “Association”) are dischargeable in bankruptcy. Here in Pennsylvania, POAs, also known as community associations or homeowner associations, are usually created pursuant to a “planned unit development” (PUD), which is a subdivision of building lots governed by private rules and bylaws. Each lot owner is bound by the rules and bylaws, and is required to pay “dues” or “assessments” to share in the cost of maintaining community assets such as roads, parks, swimming pools, clubhouses and landscaping.
In Pennsylvania, the dues and assessments become a lien against the property automatically upon assessment, similar to real estate taxes, under the Commonwealth’s Uniform Planned Community Act (UPCA). This automatic lien can last as long as four years if not satisfied. A POA may foreclose upon the lien in like manner as a mortgage, but doing so is a relatively uncommon occurrence since senior liens – such as mortgages – would need to be satisfied in the process, and POAs are not usually in a position to expend large sums of money in hopes of recovering outstanding dues.
Outstanding POA dues and assessments have both “secured” and “unsecured” components. The lien against the property afforded by the UPCA secures dues and assessments as a lien against the real estate. In addition, each property owner in a PUD has essentially agreed to be personally responsible for sharing in the costs of the community, in essence volunteering to be members of the POA and subject to its rules and costs. The dual status of POA dues and assessments have an impact on how the obligations are treated in bankruptcy.
If a bankruptcy debtor intends to surrender his or her property to foreclosure, in both a Chapter 7 and Chapter 13 bankruptcy case the debtor can eliminate responsibility for paying past POA dues and assessments. At least in a Chapter 7 case, the debtor may remain responsible for after-bankruptcy POA dues up until the time of the foreclosure sale. An argument can be made that a Chapter 13 debtor who surrenders his or her property, and does not receive any benefit from the property after the bankruptcy filing, is not responsible for post-bankruptcy POA dues and assessments.
If a bankruptcy debtor intends to retain the property and file a Chapter 7 case, his or her personal responsibility for the pre-bankruptcy POA charges will be eliminated, but the Association’s lien will remain. The Association would only be able to effectively collect on its lien if there was equity in the property over and above the mortgage(s) and other liens. Frequently the pre-bankruptcy dues and assessments can be eliminated without fear of collection by the POA, although this possibility would need to be discussed with your attorney. The property owner would remain responsible for future dues and assessments.
If a Chapter 13 debtor intends to retain his or her property, dues and assessment existing on the date of the bankruptcy filing must be paid through the Chapter 13 plan up to the extent of the Association’s lien – which will ordinarily be no more than four years of fees. Consequently, if a Chapter 13 debtor owes two years of dues and intends to retain his or her property, those dues will need to be paid through the Chapter 13 plan established with the court. If six years of dues and assessments are owed, however, the lien for the two oldest years would have expired, leaving the debtor responsible for paying four years of dues and assessments through the Chapter 13 plan. The debtor would remain responsible for future POA dues.
If you need additional information concerning the possibility of discharging POA dues and assessments in bankruptcy, you should consider speaking with an experienced bankruptcy attorney practicing in your area.
Newman Williams – Vincent Rubino
712 Monroe Street
Stroudsburg, PA 18360