What happens after the bankruptcy discharge: An emerging (and disturbing) trend in foreclosure, bankruptcy, and HOA law

The prevalence of foreclosures in the real estate market has had several unexpected repercussions to distressed homeowners who have made the decision to walk away from their home.  Banks appear to be unable, incapable, or unwilling to handle the volume of foreclosures, so a distressed homeowner may continue to own his or her home for months, and occasionally even years, after receiving a Notice of Trustee’s Sale (rather than the 90-days stated in the Notice).

Because you are legally responsible for payment of assessments until you are no longer the owner, it is important that you continue to pay your HOA assessments until you have received confirmation that there is a new owner (most commonly in the form of a Trustee’s Deed Upon Sale).  Many people who make the mistake of thinking that they can simply return the keys to the bank or that the Notice of Trustee’s Sale means they no longer own the property get a rude awakening after a few months: A hefty bill for unpaid assessments from the HOA that in all likelihood includes collection costs such as attorneys’ fees.  The HOA also may file a lawsuit to collect those assessments.  Because such collection actions almost always increase the amount you are obligated to pay, it is important to make sure that you continue to pay your assessments until the trustee’s sale is completed.

Many distressed homeowners are turning to bankruptcy as a solution, logically thinking that it simultaneously eliminates their personal obligation to pay HOA assessments and creates the vehicle for walking away from their home.  Ordinarily, the bank will seek, and obtain, permission from the bankruptcy court to conduct the trustee’s sale and notice the trustee’s sale.  Then, the homeowner is discharged from bankruptcy and is able to start fresh without being weighed down by the debts.  At least this is how it is supposed to happen.

But what happens if the bank postpones that trustee’s sale or, as we are commonly seeing, simply cancels it for whatever reason.  One possible reason for the bank to postpone or cancel the sale is that it has too many foreclosures and does not want to take on the added cost of HOA assessments, so it decides to hold off on the foreclosure, thus leaving you responsible for assessments.  The HOA does not care that the bank is dragging its feet, but you should—you remain obligated to the HOA until you are no longer the owner!  So while the discharge may have eliminated your personal liability for past assessments, the HOA can, and will, begin to charge you for assessments that accrue after you have been discharged from your bankruptcy.  So it is important for a distressed homeowner who has filed for bankruptcy to stay abreast of the trustee’s sale and not simply assume that the bank has followed through with its stated intention of foreclosing.

The distressed homeowner is not without possible remedies against the bank.  Call us to schedule a consultation with an attorney to discuss these possible remedies or read more about it on our Bankruptcy page.