Although the financial crisis is believed to be improving, one thing remains the same — some condo owners may face tough financial times during the course of their ownership. A common way to manage these financial troubles is to file for bankruptcy. The federal court system has a special set of courts called bankruptcy courts, which are responsible for adjudicating debt discharge or reduction cases. The bankruptcy process allows debtors to seek a fresh start under Chapter 7, or a form of payment plan or debt reduction under Chapter 13.

Often, condominium associations and management companies have many questions regarding this process. This article will address some common basics, but each case may be different so your association should talk to its lawyer regarding options.

What Type of Bankruptcy Is It?

The U.S. Bankruptcy Code, or federal law, provides for two types of general bankruptcy actions for individuals. These are Chapter 7 and Chapter 13 bankruptcies, named for sections of the code.

Chapter 7 bankruptcy seeks a total discharge of all debts due from the owner at any time, and for all debts incurred prior to the date on which the owner files a petition for bankruptcy discharge. This means that a debtor would like to be excused from their pre-petition debts; this process generally does not relieve a debtor from paying for new debts. Chapter 13 bankruptcy provides for a reduction or reorganization of the individual’s debts that were incurred prior to the petition date. This process involves a form of payment plan through which the court and a bankruptcy trustee supervise a debtor’s repayment of certain debts over time. Once the individual has complied with the payment plan and satisfied their creditors, the individual will be granted a discharge of their pre-petition debt to the extent not paid or provided for in the plan.

There are some common features of each type of bankruptcy that condominium associations and management companies should know about; most important, both have what is called a “petition date.” This is the date on which the individual files for bankruptcy protection by filing his or her first filing in the bankruptcy court. At the same time the petition is filed, the court grants what is called an “automatic stay.” The automatic stay is an injunction from the bankruptcy court that prohibits any activity by creditors, like associations, that try to collect any pre-petition debt without further permission from court.

The automatic stay is a total prohibition of any types of collection activity. This means that associations may not seek to collect any pre-petition debt from either a Chapter 7 or Chapter 13 debtor. The automatic stay is not yet permanent though; associations may seek permission from the bankruptcy court to proceed on post-petition debt or, in the case of a Chapter 13 case, to collect on any Chapter 13 payment plan defaults.

How the court reviews and administers the case is another common feature to both bankruptcy actions. Each has an appointed person, a trustee, who is responsible for reviewing and determining the disposition of the individual’s property in what is called a debtor’s estate. The debtor’s estate is the legal concept that holds title to or responsibility for all the debtors’ assets or debts at the time the petition is filed. This includes condominium properties and the debts due to condominium associations.

Another common feature of both types of bankruptcies is that the filing of the bankruptcy action does not necessarily preclude the collection of post-petition date assessments. Federal law was changed a few years ago to provide that condominium owners are still responsible for post-petition assessments, under both types of bankruptcies, after the petition has been filed and until the date on which the owner no longer owns or has a legal interest in the property. In order to collect these post-petition assessments (discussed further later), associations must take affirmative steps while the bankruptcy is pending and seek leave of court to proceed with any type of post-petition collection activity.

A final similarity between the two types of bankruptcies is how the court deals with pre-petition debt. In both the Chapter 7 and the Chapter 13 bankruptcy, the eventual relief from the bankruptcy court, once it determines that discharge is appropriate, would be that certain debts incurred before the petition date would be discharged forever. A Chapter 7 bankruptcy operates as a “fresh start” in which all pre-petition debts are discharged. A Chapter 13 bankruptcy provides that all pre-petition debts will be discharged (to the extent they are not paid in part through the Chapter 13 plan), once the debtor has complied with the Chapter 13 plan and made all of their payments according to the plan.