While the housing market appears to be improving, many people in bankruptcy are still grappling with the reality that they cannot afford their mortgage payment. In addition, these same people are weighing their options as it relates to their home. Should we keep it or let it go? One consideration that homeowners have to consider is the current state of the homeowners' association (“HOA”) dues.
It should come as no surprise that if someone has not been paying their mortgage payment for some time it is highly likely that they have not been paying HOA dues during that same time. HOA dues are not a major issue here on the East Coast but they are not unheard of either, especially if you own a condominium or townhouse in a planned community. The HOA dues you are required to pay are tied to your ownership of the property. As a consequence, if you are the titled or deeded owner of the property you are contractually and statutorily obligated to pay HOA dues for that property.
In addition, under Title 11B of the Real Property Article of the Annotated Code of Maryland, the HOA can take a variety of enforcement actions against you, including encumbering your property with a lien. While this lien is governed by the Maryland Contract Lien Act at Title 14 of the Real Property Article of the Annotated Code of Maryland, the process of creating this lien should be detailed in your HOA agreement or Covenants, Conditions, and Restrictions (“CC&R”). An additional benefit of this lien for the HOA is that a portion of your liability has priority even over your first mortgage lender. This priority will increase your deficiency liability should your property sell at foreclosure.
Turning back to the question at hand, while in bankruptcy, how much, if any, of this liability should you pay? As with everything in life, it depends. Under Section 523(a)(16) of the Bankruptcy Code, any debt you owe to an HOA that came due after you filed for bankruptcy is not discharged. Any debt that was due before you filed for bankruptcy is discharged. The strategy you use depends on what you are going to do with the home.
If your intent is to keep the house you will want to not only pay the HOA dues that come due after you file but find a way to pay the dues that were due before you filed. The reason is that because of the delinquent dues, under your HOA agreement, there is probably an HOA lien on the house already. If you intend to let the house go, you will want to pay the HOA dues that come due after you file and until you are no longer the owner of the property. If you are letting the house go, the lien that the HOA has placed on the property will not matter to you. The only concern you will have is those dues that came due after you filed because you will be liable to pay those after your bankruptcy discharge.
The ownership of the property is the key factor in this discussion. As in many cases, the lender takes a very long time to foreclose. If you elect to remain in the house until the bitter end, you will need to pay those HOA dues that have come due after you filed. As an example, if you move out and the lender takes another eight months to foreclose you are responsible for those eight months of HOA dues. This is of special concern in Maryland where the foreclosure process is judicial foreclosure and that process alone can take upwards of four months to complete. In addition, you cannot transfer ownership to property in Maryland without the consent of both parties. In some states, especially in the west, you can transfer ownership at anytime without the consent of the other party through a quit claim deed.
In the end, decisions about HOA dues need to focus on your intent regarding the house and where you are in the process.