Collection Amidst COVID

The worldwide COVID-19 pandemic has thrown everyone for a loop. While unemployment rates are slowing dropping, they are still well above where they were pre-COVID-19. Millions of people have been furloughed or laid off.  Many are underemployed, earning far less than they were at their pre-COVID jobs.

Regardless of their members’ employment status, however, homeowners associations still need members to pay their assessments. It is no secret that, without a steady stream of assessment payments, associations cannot function. In fact, members of an association’s board of directors have a fiduciary duty to all members of the association to collect assessments to full extent possible.

What are a homeowners association’s options in dealing with delinquent accounts?

• If an association has a collections policy (and it should), follow that policy.
  • If an owner is supposed to receive a late notice if the account is more than thirty (30) days delinquent, send that notice.
  • If an account is supposed to be sent to collections if the balance is more than a specified dollar amount or is more than a certain number of months past due, send the account to collections.
• Don’t delay pursuing collection of unpaid assessments. It only makes the problem worse.
  • It’s easier to write a $500 check than a $1500 check.
  • If a debtor files bankruptcy, the association may be left “holding the bag” on a higher amount of money than it would have if the association had pursued collection sooner.
  • Notwithstanding the above, if a debtor can show that he has applied for funds to bring the account current and will receive those funds within 30-60 days, the board can make the decision to delay collection efforts. However, the debtor must have a concrete plan for paying the delinquency. Saying, “I’ll bring the account current as soon as I get a new job,” simply isn’t concrete enough.
• If a debtor requests a payment plan, the board should ask the debtor to propose a plan.
  • In some cases, the debtor may actually propose to pay more each month than a board might offer.
  • If no plan is requested, don’t make the first offer. Payment plans should be the exception, not the rule.
  • If debtor and the association agree on a plan, put the details of the plan in writing and have the debtor sign the plan. Electronic signatures are acceptable. Even an email from an address known to be that of the debtor saying, “Yes, I agree to this plan,” (or something similar) will suffice.
  • Track payments. If debtor misses a payment, contact them to “remind” them that their payment under the plan is late. If debtor fails to make the missed payment immediately, or fails to make another payment, the board should consider terminating the payment plan and moving forward with further collections efforts.
• Encourage members suffering financial hardship to contact the board/management sooner rather than later. Members who wait for the association to demand payment are likely to be a greater payment risk than those who are proactive in contacting the association.
• Once an account is sent to legal counsel for collections, the association’s collections attorney will guide the board of directors as to how best to proceed based on the likelihood of collection.
  • Foreclosure is still the most effective tool in an association’s collections tool kit. While it may seem harsh to foreclose on members who are suffering a setback due to circumstances beyond their control, the reality is that the association needs the money to meet its own financial obligations to contractors, insurance companies, etc. In general, associations do not want the home; they want the money.
    • If there is significant equity in the home, debtors may take steps they might not otherwise take in order to get the debt paid (e.g., 401K loans; loans, grants or gifts from friends, family, church, assistance programs, etc.).
    • The association might also be outbid at its sheriff’s sale by a third party. In that case, the association is paid its bid amount shortly after the sale takes place.
  • Starting a lawsuit against the debtors based the amounts owed is also an option, but it does carry risks:
    • Suing the debtors gives them a platform (the lawsuit) in which to make claims against the association.
    • Even if the association obtains a judgment, it still has to collect that judgment amount. In general, if the debtor still lives in the community, those collection costs can be assessed to the delinquent owner; if the debtor no longer lives in the community—most likely due to foreclosure of the first mortgage—the costs of collection cannot be assessed to the debtor (and the likelihood of collection drops significantly).
    • If the debtor files a Chapter 7 bankruptcy petition and receives a discharge of debt (as is typical), the judgment is wiped out. Filing bankruptcy certainly affects an association’s lien foreclosure, but it does not usually wipe out the association’s lien.
  • Even after an account is sent to collections, the debtor receives multiple notices of the delinquency, and has multiple opportunities to pay the entire outstanding balance, or to request a payment plan. Sometimes it takes correspondence from an attorney to get the debtor’s attention.

It’s natural—indeed, it’s appropriate—for a board to want to show a member compassion in a difficult time. Some level of forbearance may provide debtors with the time needed to obtain the funds to bring their accounts current. However, if members are not paying assessments in a timely manner, everyone suffers. Without sufficient funds coming in, larger projects may need to be delayed. Maintenance may suffer, which will have an impact on the appearance of the community. Amenities may have to be closed. That simply isn’t fair to those members who are working very hard to pay their assessments every month, but the association may have no choice.

The information in this article is provided solely as general information and not as legal advice. Receipt of this information or its use does not establish an attorney-client relationship. Readers are urged to speak with a qualified attorney experienced in community association law when making decisions regarding a specific legal issue.