Condo Law Watch

Chapter 11 and “Chapter 20″ Bankruptcies: Understanding the Unusual Case for Associations and Assessment Collections

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There are two types of bankruptcies that are a bit different from the standard consumer Chapter 7 and Chapter 13 bankruptcies. These are Chapter 11 bankruptcy for corporations and so-called “Chapter 20” bankruptcy, which is a Chapter 13 bankruptcy that is converted to a Chapter 7 bankruptcy. These two types of bankruptcies can complicate assessment collection matters.

A Chapter 11 bankruptcy is allowed for a corporation (but sometimes for individuals, too). It is seen most commonly in the condominium context when a corporate owner seeks reorganization of its debts. This may include the reduction of certain pre-petition debts, the sale or liquidation of property owned by the debtor, and discharge of some debts. With an increase in corporate ownership of condominium units nationwide, Chapter 11 bankruptcies may become more common for bulk and investor owners of the units.

In a Chapter 11 bankruptcy, an association will be given certain deadlines for stating their claims during the course of the proceeding. The association is barred from attempting to collect pre-petition assessments without the permission of the court. Normally the debtor will have some form of reduction or settlement with its creditors, potentially a payment plan for existing obligations, and some liquidation of its property to reorganize in a more workable state. This may include an individual condominium unit being sold as part of the bankruptcy proceeding. If so, the sale of the unit during the bankruptcy proceeding would not necessarily prevent the association from collecting assessments due. Nevertheless, the association should seek the advice of its counsel and file the proper pleadings in the bankruptcy court to protect that interest.

Nicknamed by attorneys as “Chapter 20” bankruptcy because it’s a combination of Chapter 13 and Chapter 7, a Chapter 20 is not a separate type of bankruptcy or separate Chapter under federal law. Rather, it is when a debtor files a Chapter 13 petition and then seeks to convert to Chapter 7 if the payment plan is not workable.

Associations facing a “Chapter 20” bankruptcy should know that there is a new form of cut-off date that happens while this is pending. While a Chapter 13 has a petition date so an association knows what constitutes pre- and post-petition assessments, when a debtor converts to a Chapter 7 within a Chapter 13 bankruptcy, the conversion date becomes the new petition date. This means the association must split the ledger again to show pre-conversion date and post-conversion date assessments. The pre- conversion date assessments are treated just like in a standard Chapter 7 bankruptcy in which no collection activity may be undertaken against those amounts. Associations still may proceed to collect unpaid post-conversion date assessments with leave of court if those balances are due. The most common result of a Chapter 20 is that the debtor will obtain a full fresh start discharge like they would under a standard Chapter 7 case.

Though bankruptcies can be confusing, with the appropriate attention to detail and qualified advice from counsel, associations can be protected. Bankruptcy law allows for associations to seek recovery through the bankruptcy court action and protects an associations’ right to collect what is due post-petition, while providing for protection to individuals who require financial reorganization.

Please feel free to contact us if you have any questions regarding bankruptcy issues facing your association and we welcome the chance to discuss issues with you in the future.

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