Bankruptcy does not prevent actions to collect assessments

Mark Pearlstein

Condo Adviser

May 11, 2012


Q. I am on the board of a medium-size homeowners association of 150 units. Collection problems make budgeting a definite challenge. One owner has been in bankruptcy for several years and has not paid monthly assessments in more than three years. The association has placed a lien on his property, but we have been advised that the bankruptcy stops all further action on our part.

It seems unfair that the other owners must effectively cover the delinquent owner's deficiency while he enjoys all the benefits of the association for free. Does the association have any recourse?

A. The bankruptcy filing of a unit owner does not prevent the association from taking legal action to collect assessments. The scope of the association's remedies will depend upon the type of bankruptcy filed by the unit owner, and will require the association to obtain court permission to lift the automatic bankruptcy stay to proceed with its state court collection remedies.

If the unit owner files a Chapter 7 bankruptcy petition requiring the debtor to sell his assets, the association is entitled to collect assessments that accrue after the filing if the debtor either resides in the unit or rents out the condominium.

If the owner files a Chapter 13 petition, the owner must submit a plan to pay a portion of his debts that arose before the filing. The plan will include the secured claim of the association. The debtor must also pay assessments that accrue after the Chapter 13 filing. In a 2011 case titled In Re Spencer, a Michigan federal court held that the debtor was liable for assessments due before and after the Chapter 13 because he continued to own the unit.

If the Chapter 13 debtor fails to meet the payment obligations of his plan or does not pay assessments due after the bankruptcy filing, the board may dismiss the bankruptcy and collect both past due and current assessments.

Q. I am in an 80-unit, 20-year-old condominium. Our board has less than one year of financial records. What records exist show a very small amount of reserves. We have had no capital expenditures for the past 10 years, but did have a huge special assessment two years ago. We also have not had an explanation as to why the board decided not to spend the funds collected as a special assessment, and we have not seen any evidence that the money was added to our reserve account.

Is it legal to have almost no records? Our board refuses to answer any questions about these issues. Where do we go from here?

A. The primary goal of the owners should be to elect a new board of directors.

Section 19 of the Illinois Condominium Property Act requires the board to maintain 10 years of financial records. The absence of reserves generally means a violation of Section 9 of the act, as well as your declaration. The fact that the association had a large special assessment may be due to the lack of reserve savings.

Section 18(a)(7) of the act requires the board to submit an annual accounting of income and expenses to the owners. This accounting should explain what portions of the reserves were used for capital expenditures or repairs.

Q. After many attempts to obtain copies of invoices for elevator service work, I was finally given copies of these documents. Since it was my legal right to review this information, can I recover the legal fees I had to spend to hire an attorney to obtain the invoices? Would I file a claim in small claims court?

A. The only means to recover attorneys' fees under Section 19 of the Condominium Property Act is an enforcement action against the association after the board refuses to give the owner requested information. Since you received the documents and did not file a lawsuit, you will have to bear the cost of your legal fees.