The ultimate option the community association has to collect on delinquent assessments is the lien. However, the lien is like the nuclear 'football' that follows the president. It can and should be considered only as a last resort, and with extreme prejudice by the board. There are other actions you can take to attempt to collect before you resort to selling someone's home out from under them.
No, I am not referring to breaking arms and fitting delinquent homeowners for a pair of cement shoes! Community Associations are still subject to the Fair Debt Collection Practices Act. But communities do have options to aid in collections beyond simply sending warning letters and assessing fines.
CAM Professionals are often called upon to advise the board of their options when it comes to collections. To better advise them, familiarize yourself with the pros and cons of these options:
- Special Circumstances (non legislative)
If a person in the community is having trouble paying their overdue assessments, the board can vote Special Circumstances. Under this option, the board can waive late fees and other penalties, and allow the homeowner to begin a payment plan to recover. However, it is strongly recommended that the board should NOT waive the assessments (both past due and future). Hard costs and assessments must be accounted for in order to maintain the financial integrity of the association.
- Referral to Attorney (legislative)
The attorney ultimately has the power to file a lien on the property if the homeowner fails to pay, but most collections attorneys take steps to collect the debt prior to taking that final step. An official letter from an attorney's office is often enough to make a delinquent owner pay up! Beware though that the attorney's fees are more than just the retainer the association pays - every action they take will be added to the homeowner's debt, causing that debt to skyrocket quickly. This can make it even harder for a homeowner already down on their luck to make good.
- Credit Reporting (non legislative)
One new option for community associations is the ability to report delinquencies to credit reporting agencies. Sperlonga is an industry partner that can work with you to integrate credit reporting into your accounting software automatically. Credit reporting works as more of an incentive to encourage homeowners to pay on time, so as not to negatively affect their credit rating. For homeowners in arrears, it may not be as effective, unless the homeowner is working to clean up their credit rating, but it is a good deterrent for homeowners that pride themselves on a good credit rating.
- Small Claims Court (legislative)
You can take delinquent homeowners to small claims court, but be aware that some states limit the number of cases a single entity can bring per year (usually 10 to 15). If you are successful in small claims court, the judge may grant a judgement to garnish the wages of the delinquent owner to recover the amount owed. However, this does not cover continuing accrual of current and future assessments due.
- Collections Agency (non legislative)
Collections agencies will work with your community to attempt to recover a percentage of delinquent funds, or will outright buy the debt from the association. This can help recover some of the lost revenue, but beware that collections agencies almost never cover the full amount (or even a significant portion) of the debts owed to the association.
- Debt Purchase (non legislative)
Some collections companies, such as Axela, will purchase the right to assume the debt of delinquent homeowners, then take on the task themselves of collecting the payments. They will work with the board for a period of time to attempt to collect the debt, but of those efforts fail, they will buy the debt outright and begin legal actions. This can be a great option for the association as a quick way to get bad debt off their books. However, once they resume the debt, the board relinquishes control over said debt, so you should consult your attorney to understand the impact this will have on your community members.
Placing a Lien
The final solution is the lien, but even if you've gotten to this point, there is still hope that you may not have to use it. A good collections attorney will work with your community to take on those delinquent homeowners and work to collect on the debt using the threat of the lien as a deterrent. If all other efforts fail, the attorney can initiate the lien process after a time specified in the community's collections policy.
Once a lien is granted, a period of time is given to notify all of the stakeholders: most importantly, the primary mortgage holder, who may opt to pay off the lien and either take over the property from the homeowner, or work out some plan with the loan holder. If no action is taken, and the property is in a super-priority lien state, the home may go on the Sheriff's auction block.
Short Sales and Writing off Old Debt
When the delinquent amount exceeds $5,000, the likelihood that the homeowner will be able to pay off the debt becomes microscopic. Their options may be limited to just a few things:
Association fees are assessed up to the very day the title of the home transfers, so homeowners do not get off the hook for their assessments simply by filing for bankruptcy, even if they surrender their home. If a lien had already been placed on the home, any sales as a result of the bankruptcy will cover the lien. However, in cases of Chapter 11, the judgement will often include only a partial payment of the past due assessments. In these cases, the association should write off any leftover bad debt that has been forgiven by the courts.
- Foreclosure / Abandonment
If a homeowner opts to simply walk out on the home, or the home is in foreclosure, the community association may still pursue options. As the manager, you should participate in pre-foreclosure proceedings to initiate a payment plan or points to cover delinquent amounts. If this fails, talk to your association attorney, who may still be able initiate some actions.
- Short Sale
At any point in this process, the homeowner may opt to simply sell the property in an attempt to make the debt go away. If the amount they owe is larger than the amount of the sale, it's called a short sale. If the board is approached to consider a short sale, they should be more lenient on the amount they are willing to accept, as they are very unlikely to receive the full amount of the assessment from a potential buyer.
There is generally not a lot of time to make a decision on a short sale, and most communities require a resolution of the board in order to approve a short sale. Your policy should include a provision to allow a resolution by 2/3rds of your board members to enable them to accept short sales on certain criteria not to exceed a set amount.
At the end of the day, it's important for the association to collect on monies owed, or all of the homeowners in the association pay the price. But there are alternative options that make collecting on that debt more palatable. Whatever you advise your boards to do, keep the nuclear option as a last resort, as there are still plenty of options available. Make sure you consider the health and happiness of the community as a whole, not just the immediate needs.