What Do We Do When a Condo Owner or Co-op Shareholder Goes Bankrupt?
March 8, 2011 — A chain is only as strong as its weakest link, and when an apartment-owner declares bankruptcy — becoming unable to pay the monthly charges or assessments and risking bank takeover of the condo unit or co-op shares — it can affect your buildings' finances in smaller or larger ways, most acutely with small buildings. Here are five Q&As that will help get you through.
Q: What do we do if we receive a Notice of Bankruptcy Filing?
A: Immediately inform your board's attorney — or your collections attorney, if you have one specifically — if you receive notification that a homeowner has filed bankruptcy. If your attorney has an active collections file against the homeowner, you are required to suspend further collections efforts against the homeowner while the bankruptcy is pending.
If there is no an active collections file against the homeowner, forward the notice to your collections attorney anyway. Your attorney will be able to access the Bankruptcy Court's records and can file any paperwork necessary to be sure that your condominium association or cooperative corporation is protected throughout the bankruptcy proceedings. He or she can also monitor the proceedings and update you as to any significant developments.
Q: What do we do if we receive a Notice of Possible Dividends?
A: If the Bankruptcy Trustee is able to locate funds that could be distributed to creditors during a bankruptcy, the Trustee issues a Notice of Possible Dividends. If you receive one, inform your attorney as soon as possible. Funds are distributed to creditors in order of their priority. In order to be eligible to receive funds, a creditor must file a Proof of Claim with the Bankruptcy Court.
The Notice of Possible Dividends will state a deadline by which time the condo association / co-op must have a Proof of Claim filed. Be sure to forward the Notice of Possible Dividends to your attorney with adequate time to file the Proof of Claim before the due date.
Q: How long does a bankruptcy last?
A: The length of the bankruptcy is difficult to predict, as it depends on many factors out of a board's control. However, a Chapter 7 bankruptcy commonly lasts six to nine months, while a Chapter 13 bankruptcy commonly lasts three to five years.
If a homeowner in the collections process has filed bankruptcy, the association's / corporation's status report will provide information about the progress of the bankruptcy. The following are common questions regarding status report entries regarding the bankruptcy:
Q: Why are there months of entries that say only that the bankruptcy is being monitored? Why is our attorney not trying to collect from the homeowner?
A: While the homeowner has an open bankruptcy pending with the Bankruptcy Court, attorneys are very limited in their collection options, and cannot actively make any efforts to collect. Your attorney will file any necessary paperwork with the Bankruptcy Court and will monitor the bankruptcy proceedings in order to confirm that the association's interests are as protected as possible during the bankruptcy process.
If the homeowner intends to retain ownership of the apartment after the bankruptcy has been completed, he or she is required to continue to pay current assessments as due, even during the bankruptcy process. Let your attorney know as soon as possible if a homeowner is not paying current assessments while their bankruptcy is pending.
Q: What is the difference between a discharge and a dismissal?
A: If a homeowner successfully completes a bankruptcy, his or her debts are discharged. In a Chapter 7 bankruptcy, this means that the balance due as of the date the bankruptcy was filed must be written off and is no longer a personal obligation of the homeowner. Once a bankruptcy is discharged, you will receive a letter from your attorney with additional information about the effects of the discharge.
However, occasionally a bankruptcy will be dismissed. A dismissal generally occurs when a homeowner fails to comply with a requirement during the bankruptcy process. If the error is not corrected, the bankruptcy is dismissed, which allows you to immediately proceed with collection efforts. The full balance remains due from the homeowner, as though no bankruptcy had been filed.
Kristen N. Dillie is attorney at HindmanSanchez P.C., and a member of the Colorado Bar since 2008. This is adapted from her article at the firm's website.
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