Surrendering Your Home in Bankruptcy: What About HOA Dues?

December 20, 2012

Sometimes, what you thought was your dream home can turn into a nightmare. Excessive heating and cooling costs, high property taxes, oppressive mortgage payments; the expenses associated with homeownership can quickly spiral out of control.

Bankruptcy can be a great way to get out from under oppressive debt, and many consumers choose to surrender their home during bankruptcy in order to completely wipe the financial slate clean. But, even if you surrender your home, it will likely take weeks or months before the eventual sheriff's sale. While you are trying to get your financial life back on track in the wake of your bankruptcy, you will likely be wondering whether you should continue to pay costly homeowner's association (HOA) dues in the interim period.

HOA dues will accrue, but paying them in full may not be your best option

When you file for bankruptcy, you may list that your intentions are to "surrender" your home. However, while the bankruptcy can eliminate your financial liability, the bank must still foreclose on the property to remove your name from the title and terminate your ownership of the property.

Sometimes, the foreclosure process can move slowly. While generally all the debt you owed the day you filed for bankruptcy will be discharged, including past unpaid homeowner's association dues, you are responsible for HOA dues and assessments going forward so long as you remain the deed-title owner of your property. This means that until your lender takes possession of the property, you owe current HOA dues and assessments.

Yet, while you owe HOA dues, you might want to hold off on paying them. When your homeowner's association dues are delinquent for a certain amount of time, the HOA will likely place a lien on the property (a lien for HOA dues is only against the home itself, not your personal property, salary or bank account). This lien has priority over the foreclosing party's lien, and must be satisfied out of any eventual sale. Therefore, once the sheriff's sale takes place, unpaid homeowner's association dues should be paid out of the proceeds of the sale. Once the homeowner's association has been paid, your liability will be gone.

Withholding HOA dues that accrue after you file bankruptcy can be risky, however. Until the time the property is sold, the HOA may pursue legal collection efforts against you; some experts recommend continuing to pay HOA dues as long as you continue to occupy the property, or if you are renting it out. Others advise setting aside the money that you would be using to pay the HOA dues; that way, if the issue becomes a concern, you will have funds available to satisfy your obligations to the HOA -- and if not, you will have a nicely stocked savings account that you can put to good use after the date of the property transfer.

California law may offer protections

Homeowner's associations typically do not go after bankruptcy filers for ongoing dues, waiting instead to be satisfied through the eventual property transfer. Even if they do, in California, homeowners have one possible legal protection under CCP 726(a). This law requires pursuit of the property prior to bringing any action against you personally, meaning that the HOA may first have to attempt its own foreclosure action before making any other collection efforts against you. There is some question of whether homeowner's association liens fall within the protections offered by CCP 726(a), but the bottom line is that you will at least be able to make a good legal argument.

If you're considering bankruptcy, or are already in the bankruptcy process, an attorney can help you make the right decisions when it comes to HOA dues. Talk to a California bankruptcy attorney today to explore the best options for your individual circumstances.

Article provided by Sobti Law Group
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