Can I Eliminate HOA Fees in Bankruptcy?

Discharge HOA fees with bankruptcyFor some reason, HOA fees tend to be a sticking point for chapter 7 bankruptcy debtors. I cannot tell your the number of clients that inquire about discharging past-due HOA debt in bankruptcy.

Now that I have said it out loud, I guess it isn’t all that hard to fathom. Want to hear a confession (well, one part confession and one part pet peeve)? I just received a fine from my personal HOA for 5 weeds in my front yard (yes, I counted them). I guess my yard work is on par with my blogging: A for effort, but not execution.

Anyways, let’s return to the topic of eliminating Arizona HOA debt in chapter 7 bankruptcy. My advice to clients regarding their HOA debt is simple. As long as you remember the following two points, it is pretty easy to understand what happens to HOA debt in bankruptcy:

  1. HOA debt is secured with a lien against your property. Therefore, in many respects, in can be considered analogous to a mortgage or HELOC.
  2. Chapter 7 bankruptcy allows debtors to discharge debts acquired prior to filing. It does not, however, allow the discharge of debt acquired post-filing.

What this means, in the most general terms, is that the personal liability attached to pre-bankruptcy HOA fees can be discharged in bankruptcy. However, the same does not apply to fees accumulated after your petition was filed. How will this impact the average chapter 7 debtor? Let’s look closer at the exact language of the bankruptcy code to get a better idea.

The fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.

Notice the line in bold. From the time period starting with petition-filing and lasting so long as “the debtor or the trustee has a legal, equitable, or possessory ownership interest” in the property, any HOA fees that accumulate are the responsibility of the debtor.

This means that if you have legal ownership of the property (i.e. you have vacated the property but title has not yet been transferred) or possessory ownership (i.e. your home has been foreclosed upon, but you still live there), you may be liable for any association fees that accumulate.

With regards to HOA fees, how then should an Arizona chapter 7 debtor juggle their bankruptcy and their home to minimize post-petition liabilities? There are several options.

  1. You can continue to pay your HOA fees after filing, until you have vacated the property and title has been transferred to the primary lien holder. Depending on both time frame involved and the dues associated with your specific property, this may or may not amount to a large chunk of change.
  2. Another options is to play the odds and do nothing. The thought process here is that, when the property is sold, the HOA will be paid the past-due balance as a priority lien holder and will thus have no further claim against you. It is important to understand that, for several reasons, this may not always occur. As you can imagine, even intentionally falling behind on post-petition debts can put your fresh start in jeopardy. Therefore I recommend that, if you chose to take this approach, you put aside the funds needed to pay all accumulating fees and penalties.
  3. A third option is to carefully time the filing of your case, such that there is little time for fees to accumulate between the filing of your petition and the execution of a foreclosure or deed in lieu. There are problems with this tactic as well, which can be explained by an experienced bankruptcy lawyer.

To sum it all up, remember the following. If you are filing for chapter 7 protection in Arizona, you should be prepared to pay any debts that accumulate subsequent to filing. HOA fees are no exception. This means that you may be responsible for HOA fees associated with your property, regardless of your intention to surrender the home.

As always, the best source of information regarding discharging HOA fees in bankruptcy is an experience bankruptcy lawyer. If you are located in Phoenix or Casa Grande, feel free to contact my office to schedule a free consultation with an honest local bankruptcy lawyer (that’s me).