Condo Law Watch

Weighing Options in Bankruptcy: Some Practical Considerations for Associations

There are some best practices that associations should follow when dealing with a bankruptcy. First, and most importantly, make sure that no collection activity continues against an individual who has filed bankruptcy. As soon as an association receives any notice, even an e-mail or verbal statement from an owner that they may be in bankruptcy, cease all collection activities and contact the association’s attorney. This includes no longer sending automatic monthly emails or letters to owners, with a statement of a balance due for the unit, which management companies or bookkeepers sometimes send association owners. Although the bankruptcy court case law has held, in some situations, that a notice of a pre-petition balance due does not constitute a violation of the automatic stay, it is better to be cautious than face a debtor’s motion for sanctions. It is preferable to stop issuing any notices that may contain pre-petition debt and to split a unit owner’s ledger into pre- and post-petition balances.

Another best practice is for an association or management company to contact the association’s attorney immediately upon any notice of bankruptcy or activity. Bankruptcies are not particularly simple proceedings. They include many nuances, as well as deadlines and specific steps that need to be taken to protect the association’s interests.

Some debtors have their bankruptcy action dismissed by the court for some failure to follow the bankruptcy rules. When a bankruptcy is dismissed, the debtor’s petition for discharge is dismissed and protection of the bankruptcy court ceases until the debtor files a new bankruptcy action. Also, the pre-petition debts become valid and due and owing from the debtor again. Ledgers can be recombined and collection action on pre-petition amounts can proceed. However, it is best practice to wait 30 to 60 days before proceeding after a dismissal because it is not impossible for debtors to seek leave of court to reinstate their prior case or to cure the default that caused the dismissal. When a dismissal is vacated, the proceeding continues just as if the dismissal had never been granted and the protections of the bankruptcy court remain in place.

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