When a single family homeowner files for bankruptcy protection, their mortgage lender may be affected along with other creditors. However, when a condo owner files a chapter 13 or chapter 7 bankruptcy petition, there also can be harmful effects on other unit owners and the condominium association.
The automatic stay, which applies in all bankruptcy cases in Miami and throughout the U.S., can hurt the condo association’s cash flow. The automatic stay prohibits all creditors, the homeowners’ association included, from pursuing any legal remedies to collect monies due. This means the condo association cannot take any action to collect the usually delinquent condo fees, including assessments, owed by the unit owner.
Until or unless the stay is lifted, the condo association must sit on the sidelines. The court, by order or modification, is the only entity that can change the conditions of the automatic stay. The bankruptcy court is typically reluctant to order the lifting of the automatic stay, as it provides the necessary time the parties need to organize a case and their positions in it.
The condo association must file a proof of claim, whether the unit owner files for Chapter 7 (liquidation) or Chapter 13 (wage earner) bankruptcy. All creditors must file this proof of claim, showing any unpaid pre-petition debts owed by the unit owner. The homeowners’ association will be treated like all other creditors. They must show evidence of monies owed by the unit owner.
Other unit owners can be affected in one or two ways. The owner filing for bankruptcy may have a mortgage that forces them to list their unit as a short sale, dragging down the current values of other condo units. If part of the condo assessment is for deferred maintenance and necessary repairs, other unit owners may have their special assessment amount increased, if the association cannot collect delinquent condo assessments owed by the bankrupt condo owner.
Source: Daily Herald, “Condo Talk: Basic guide to unit owner bankruptcies,” David M. Bendoff, June 16, 2012