Homeowners Associations and Bankruptcy: How Does Bankruptcy Affect My Condo or Townhome and My Association Dues (HOAs)?

The prevalence of condo and townhome development in the mid-2000s throughout Minneapolis and the suburbs was hit especially hard by the decline in the real estate market, with prices sinking disproportionately on these urban homes that were often originally overpriced and over-marketed to younger consumers. Owners of condos or townhomes who file bankruptcy should be aware of the Minnesota laws that govern the association’s rights as well as be properly advised of what bankruptcy can and cannot do with regard to unpaid HOA assessments.

Under Minnesota law, a homeowner’s association has a statutory lien for any unpaid HOA assessments, which means that unpaid association dues automatically become a lien against the property much like a second mortgage would be however without the need for the HOA to record the lien with the county. Additionally, the association also has a claim against the homeowner for any unpaid HOA dues incurred prior to filing bankruptcy. With both avenues of relief available, the association has several options to collect against a defaulting homeowner, including restriction of rights to use common amenities, bringing a civil action against the homeowner and even foreclosure of the unit under Minnesota law.

While the bankruptcy of an association member will discharge their personal liability to repay the HOA assessments accrued through the file date of the bankruptcy case, the association nonetheless still retains its lien against the property. This association lien can be foreclosed just same as an unpaid second mortgage. An association lien often also includes additional amounts for unpaid late charges or interest, fines imposed upon an owner for violations of the HOA’s rules and regulations, attorney fees incurred by the association, and any other amounts charged against an owner under the association’s declaration.

In either Chapter 7 bankruptcy or Chapter 13, the rule of thumb is that a homeowner will be liable for most if not all HOA assessments in spite of their bankruptcy, particularly if the property is not foreclosed or otherwise the homeowner continues to own the property. This is because any HOAs arising after the file date of a bankruptcy case are not included in the bankruptcy, and any HOAs that arose prior to the file date of a bankruptcy case usually remain a lien against the property and therefore must be paid off in order for the owner to sell or refinance. If the property is foreclosed, the homeowner generally will owe all HOAs due through the later date of either the foreclosure (i.e., the sheriff’s sale in Minnesota) or the homeowner’s bankruptcy.

In Chapter 13, the homeowner can obtain relief with regard to HOA arrears by paying those off with interest over the course of a three to five year Chapter 13 plan.

If you are considering bankruptcy and own a condo or townhome, it’s important to understand how bankruptcy may impact your liability for HOA association dues and other assessments, your right to continue to occupy the property and use the common amenities (noting some amenities can be denied), and foreclosure. Especially under these circumstances, you should seek advice from a bankruptcy attorney who can advise you on the best way to obtain bankruptcy relief while protecting your interests with regard to your property.

Lynn Wartchow is a Minneapolis / St. Paul area bankruptcy attorney representing clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings in Minnesota since 2005. Email for a free bankruptcy consultation to understand your options in Chapter 13 or Chapter 7 bankruptcy.