UNIT OWNER STILL LIABLE IN CHAPTER 7 BANKRUPTCY

Published on: April 18, 2011

What happens when a unit owner files for Chapter 7 bankruptcy and abandons the unit?  Who is responsible for the common area fees?  Who owns the unit?  Shouldn’t the unit owner have some responsibility?  This article addresses some of those common questions and concerns in light a new decision that we just obtained from the Bankruptcy Court, written by Judge Melvin S. Hoffman.

There has been an ongoing dispute between condominium associations and unit owners/debtors in Chapter 7 bankruptcies as to who is responsible for the common area fees after the bankruptcy if filed.  Section 523(a)(16) of the bankruptcy code provides an exception to discharge in Chapter 7 case as to the common area fees.  Some debtors believe that once they file their bankruptcy petition and list the condominium unit as being surrendered, they no longer have any responsibility for any fees that come due.  The condominium associations disagree.  When presented with the question; if not the debtor then who is responsible?  The debtors consistently responded with: “I don’t know, but not me.”  Now we do know, it is you.

The issue arose in a case where the unit owner moved out of the unit, filed Chapter 7 bankruptcy and listed the unit as “surrendered”.  The condominium association filed for relief from the automatic stay to enforce its lien on the unit and the hold the Debtor personally liable for post petition amounts.  The Debtor objected relying on his “surrender” as grounds to deny personal liability.  Briefs were submitted by both sides and Judge Hoffman ruled in favor of the condominium association.  Judge Hoffman wrote: “Section 523(a)(16), on the other hand, deals with more than mere possessory interest and provides that if a debtor retains either legal or equitable ownership interest in a condominium unit, any postpetition fees and assessments remain nondischargeable…..In other words, the [Condominium] Trust will be given relief from the stay to proceed against the debtor individually for any postpetition fees and assessments….”

There is a caveat though as presented by Judge Hoffman; the condominium association must first take all steps necessary to foreclose on its lien and collect from the proceeds of the sale as allowed by law before seeking any unpaid amounts personally from the debtor.

While the full repercussions of this decision are unknown, it adds a further degree of protection to the condominium association and clarifies a point of contention between condominium associations and bankrupt debtors.  Should the condominium be in a situation where they cannot recover a special assessment from the mortgagee because it falls outside the priority lien, there is now potential to recover it directly from the debtor.

The decision on Kenneth Ames can be found by clicking here.