HOA Special Assessments and Bankruptcy


The issue of how homeowner’s association dues are treated when the homeowner files bankruptcy is for the most part settled law.  HOA dues due pre-filing are dischargeable.  HOA dues that are due post-filing are not dischargeable.  Section 523(a)(16) makes sure of this in a Chapter 7 case and provisions of the bankruptcy code in a Chapter 13 do the same.  If you stay you must pay.  The obligation to pay post-petitions is a covenant that runs with the land.

What about a special assessment of $20,000 for painting the complex or repairing a fence surrounding the association?  Was it assessed pre-petition as a lump sum just like the dischargeable HOA dues were assessed pre-filing?  Was there a lien recorded to secure the special assessment?  Was an installment agreement entered into to pay the $20,000 over year?  Some of the installment payments were due pre-filing and some of the installment payments are due post-filing.

If the special assessment was assessed pre-filing and in a lump sum without a lien being recorded it should be dischargeable just like dischargeable HOA dues that were unpaid before filing bankruptcy.  The issue of whether post-petition HOA dues are dischargeable has been litigated and lost.  The post-petition dues must be paid.  There are issues whether the dues are dischargeable if you are not occupying the home and not collecting rent though.

The biggest issue with attempting to discharge a special assessment is most likely a timing issue.  If you attempt to discharge a special assessment in a Chapter 7 bankruptcy case and the special assessment was assessed a couple months before filing the Chapter 7 there are issues under section 523 and the HOA could file an adversary complaint alleging fraud and other causes of action.  In a Chapter 13 case a HOA could argue that the covenant to pay runs with the land and to stay you need to pay the special assessment just like you will need to pay the post-petition HOA dues in a Chapter 13 case.

A larger concern is how your neighbors will treat you.  If you live in a homeowner’s association and discharge some of your unpaid dues word will get around.  If you also discharge a $20,000 special assessment and continue to live there your neighbors will most likely hate you forever.  They will be stuck with paying for your portion of the repaired fence of repainting of the association while you will not.  The long-term effect of discharging the special assessment may far outweigh the financial benefit in the short-term.  Like all legal matters, it depends upon the circumstances.