Over the last several years, there has been a significant increase in the number of individuals who have sought Bankruptcy relief. Unit and Homeowners are permitted to seek the protections afforded by the United States Bankruptcy Code. This protection is commenced upon the filing of a petition in Bankruptcy. The date the petition is filed is referred to as the “Petition Filing Date”. Unit Owners, like all other individuals, can apply for relief under either, Chapter 7 or Chapter 13 of the United States Bankruptcy Code. Once the petition is filed with the Bankruptcy Court, all creditors including Condominium and Homeowners Associations are “stayed” from continuing Collection efforts. In a Chapter 7 petition the Unit Owner/Debtor seeks to be relieved from the obligation to pay all fees and assessments due and owing to the Association up until the day the Unit Owner filed his/her petition. If ultimately granted a “discharge” by the Bankruptcy Court all fees, which were owing to the Association, are discharged and must be removed from the Unit Owner’s account maintained by the Association. In a Chapter 7 setting, although the Unit Owner’s prepetition debt may be ultimately discharged, the Unit Owner remains responsible to pay all Association assessments, which have been levied from and after the date, that the Chapter 7 Petition was filed. This is referred to as the Unit Owner/Debtor’s “Post Petition” obligation.
If the Petition filed by the Unit Owner is in the nature of a Chapter 13, the Unit Owner is seeking permission from the Bankruptcy Court to pay off the Unit Owner’s “Prepetition” debt owing to the Association pursuant to a payment plan to be approved by the Court and which typically extends over 48 or 60 months. Once the Association receives notice that a petition in Bankruptcy has been filed, it should file with the Court a Notice of Appearance as well as a “Proof of Claim” which certifies the Unit Owner’s debt to the Association as of the date of the filing of the petition in Bankruptcy. The amount set forth in the Association’s Proof of Claim should be included in the debtor’s proposed Chapter 13 payment plan. If the Court approves the plan, the debtor will make periodic payments to a Trustee appointed by the Court. Thereafter, the Trustee will periodically disburse payments to creditors including in the payment plan, which should also include the Association. Recently, there has been an attempt by Attorneys representing Condominium Unit Owners to “modify” claims filed by Associations in Chapter 13 proceedings. Attorneys representing these debtors have recently attempted to “strip off” the Association’s claim in an effort to reduce the Unit Owner’s obligation to the Association to zero. In a recent decision issued by the United States Bankruptcy Court, District of New Jersey, the Court has held that although a Unit Owner in a Chapter 13 Petition can apply to “modify” the Association’s Proof of Claim, that modification will be limited to the amount set forth in the Association’s last recorded Claim of Lien filed before the petition filing date. Associations and their Property Managing Agents are therefore best served by being vigilant in updating Association’s Claims of Lien when dealing with a Unit Owner. This is an evolving issue in the Bankruptcy Court.
Duties & Responsibilities