Homeowners Still Have Rights under Bankruptcy Law -- Avoid Violating the Automatic Stay

Regarding members of the community association who may be in or are filing for bankruptcy, board members must avoid the knee-jerk reaction of suspending common-area amenities or privileges to that member in retaliation thereof. It may seem logical to suspend these privileges because the member is delinquent on her assessment or fee payments, but such guarantees like voting rights, pool access, and even board membership are all rights that generally cannot be stripped from the member because of the federal bankruptcy court's protection. To do so could result in the issuance of a contempt order against the board member and the Association for violation of the bankruptcy court's automatic stay of proceeding.

Most community association declarations include a rule that all members must be in "good standing" to enjoy access to certain amenities, serve on the board, etc. These rules are only enforceable against a member who is in arrears but not yet in bankruptcy. Once the member has filed for bankruptcy, any attempt to penalize or collect on what's called "pre-petition" debt is seen as a likely violation of the court's automatic stay.

Crazy as it may seem, if a bankrupt member sits on the Association's board, even while past-due debt continues to be owed to the Association, that member cannot be prohibited from serving on the board. Now, this scenario may also present a conflict of interest for the affected board member, as she owes a fiduciary duty to the community, so she can be counseled by other board members to "do the right thing" and abdicate her position. However, final decision rests with the bankrupt member and only she can make that determination.

Finally, if a non-bankrupt member has been penalized for delinquent assessments or fees owed to the association resulting in a suspension of privileges and/or removal from the board, and she later declares bankruptcy, you must reinstate all privileges at once. All privileges that is, except for one: you do not reinstate the bankrupt member to the board. Reinstatement to the board is a maneuver that the board neither has the authority nor the obligation to affect.

Preparing Your Community for a Special Assessment

Every community association at some point during its operation will face the reality of needing to generate a special assessment. In good times or in bad, whether the Association has planned ahead or not, the special assessment is an eventuality that must be dealt with and administered properly. The difference between a harmonious community and one in revolt over the idea of a special assessment can be distilled down to one word: COMMUNICATION.

Levying a special assessment against the community members can be a tumultuous experience for the Association and the members alike. Particularly during a weak economy, tensions can run high when unexpected costs like a special assessment encroach on member households' budgets. But all is not lost -- there are ways to "soften the blow" for the members and help them cope with the necessity of assessing the special fee.

Breaking the News...

(1) Communicate Early and Often. Tell the membership as early in the process as is practical to do so. This can be accomplished via email, newsletter, or a special meeting. Open the topic for debate and allow for members to digest the reasons for the assessment and what they can do individually to mitigate the expense. Don't assume that the membership knows about the potential assessment; instead, assume that nobody knows and keep the channels of communication open and slowly build momentum for your special assessment.

(2) Demonstrate how the special assessment will benefit the community. If members don't understand the need for a special assessment, they won't vote for it (if your Association declaration requires such a vote.) In other words, how will this assessment affect their lives? You should emphasize the fact that the board exists to serve the interests of the community and that the special assessment will have a positive effect on the subdivision as a whole.

(3) Prove that the special assessment is a sound business decision. Explain why the Association needs the money in the first place. Review all fund-raising options that the board considered in lieu of adopting the assessment so that the community doesn't feel like the board took "the easy way out." One caution: be prepared to defend your decision with a rational, calm demeanor in the face of emotional resistance from the membership. Be sure you have a strong case to present to the members and that all avenues have been explored prior to considering the special assessment.

(4) Offer payment options. Not everyone will be able to swallow the fee increase in a lump-sum payment; instead, offer alternatives to the one-time payment and create an extended payment plan. Be sure and consult your attorney prior to doing so, as there are concerns regarding fairness during the implementation and administration of such plans, such that no member is unduly penalized by choosing the payment plan versus a payment-in-full option.