By Clint Brown
The bankruptcy process is a complicated set of procedures for all property owners association (POA) directors and community managers. In a prior blog post, we discussed the bankruptcy basics to provide directors and managers insights to navigate this difficult subject. We are going to continue that discussion in this article as we examine COVID-19 related bankruptcy issues, the “HOA reserve” and other advanced bankruptcy topics related to the Chapter 13 bankruptcy.
Automatic Stay Refresher
Before discussing the advanced bankruptcy topics, we want to revisit the automatic stay provisions of the bankruptcy process.
The automatic stay is an automatic injunction that halts actions by creditors, with certain exceptions, to collect debts from a debtor who has declared bankruptcy. 11 U.S.C. Section 362 of the Federal Bankruptcy Code prevents POAs from attempting to collect any property of the estate from the debtor.
It is important to note that violating the automatic stay can be incredibly costly and can have serious repercussions. A violation is any attempt to collect a pre-petition debt from the bankruptcy debtor. This can include phone calls, emails, or letters. All it takes is one demand for payment and the bankruptcy debtor can file a lawsuit against the POA. The number one culprit when it comes to a violation are automatically generated statements and Chapter 209 letters. So, what happens when the automatic stay is violated? Well, the individual is entitled to recover actual damages, including costs and attorneys’ fees. It is important to always report notice of bankruptcy filing to counsel as soon as possible as this will help eliminate any possibility of a violation.
COVID-19 Related Issues
Over the last 18 months as POA directors and managers have been navigating the COVID-19 pandemic, the bankruptcy code was quietly modified, which may have a potential long-term effect on POAs.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act of 2020 (C.A.R.E.S. Act) came into effect. Widely known as the bill that issued the first stimulus checks for Americans and included other pandemic related relief provisions that have become familiar, the C.A.R.E.S. Act also included a section affecting the Bankruptcy Code. Section 1113 of the C.A.R.E.S. Act included a provision that extends the length of a Chapter 13 bankruptcy plan from 60 months to 84 months under certain circumstances.
The debtor can qualify for an extended Chapter 13 bankruptcy plan of not more than seven years from when the first plan payment was due, when the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to COVID-19; and the modification is approved after notice and a hearing.
The “HOA Reserve”
Another aspect of the Chapter 13 bankruptcy process directors and board members need to be aware of is the “HOA Reserve.” The “HOA Reserve” is a Texas Southern District Bankruptcy Court Chapter 13 Plan Provision Option that has been effective since December 1, 2017. Essentially, it is an account set up for the trustee to pay post-petition annual assessments on behalf of the debtor.
To be used, the “HOA Reserve” account must be invoked by the debtor to allow for funds to grow to be used by the Chapter 13 trustee. The funds are only disbursed as amounts are available in the Trustee’s Reserve. To receive payment from the “HOA Reserve,” the POA is required to provide a statement of the outstanding assessment to the Trustee. The funds will apply to the post-petition assessment only and not any amount in the pre-petition account or interest or attorney’s fees.
Dismissal and Discharge
As the bankruptcy process concludes, there are two terms managers and directors will need to pay close attention to in the terms of continuing the functions of POA collections process – dismissal and discharge.
When a bankruptcy has been dismissed, this means the homeowner’s bankruptcy filing has been rejected. Following this decision, the POA should issue a new 209 Notice Letter unless there is a judgment or active litigation on the matter.
As a reminder, Texas Property Code Sec. 209.0051(h) prohibits a Board from initiating foreclosure actions or initiating enforcement actions unless done so in the open session of a properly noticed Board meeting. It is recommended that Board approval of the action take place when the matter is turned over to the POA’s legal counsel to collect the amount due and/or to pursue the deed restriction violation.
When a bankruptcy has been discharged, this means the process has been completed or approved by a judge. In these circumstances, the POA should use caution in their continued approach to collecting from the account. The POA Should verify treatment of pre-petition balances, if any, with counsel.
If there is a confirmed Lien Strip with Chapter 13 Discharge, the POA is required to write-off all pre-petition balances. In most cases, the POA should also remove all late charges and legal fees incurred during the active bankruptcy. Following the completion of these steps, the POA should issue a new 209 Notice Letter.
Directors and managers need to take special care when pursuing collections accounts within their POA. They should be up to date on the basic procedures within the bankruptcy process because it is imperative all bankruptcy checks are handled properly. If checks are not conducted properly, the bankruptcy court rules can result in heavy financial penalties for the POA. One notice of demand or a threatening action from a collection agent can trigger a lawsuit. In fact, the number one culprit seen across the industry that causes issues for POAs is a tool that many use to make the document process more effective – the automatically generated letter. That is why it is important for POAs to stay in communication with their legal counsel throughout the collection process.
To learn more about the bankruptcy process, join Equity Shareholder Clint Brown for a webinar on October 27, 2021 from 11:30 a.m. – 12:30 p.m. Clint will dive into COVID-19 related issues that have occurred during the pandemic. Clint will also discuss Chapter 13 bankruptcy topics and explain how the “HOA Reserve” can help the Association receive post-petition assessment funds.
