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A Co-owner Filed Bankruptcy, What Now?

Condominium associations are solely dependent upon the collection of assessments from their members for their survival and to purchase and provide the goods and services necessary for the maintenance of the project for the benefit of its members.  Thus, when a Co-owner files for bankruptcy, there is an understandable feeling that all is lost.  However, that is not always the case in every bankruptcy.  There are instances where the Co-owner will not only be responsible for post-petition assessments, but also for pre-petition assessments. The purpose of this article is to address the types of bankruptcy, how often a debtor may file for bankruptcy and practical steps in the process.

Types of Bankruptcy

In the majority of circumstances, the condominium association will face a Co-owner who files either a Chapter 7 or Chapter 13 petition.  In a Chapter 7 bankruptcy, a Bankruptcy Trustee is appointed to oversee the liquidation of the debtor’s non-exempt assets.  The idea is that the debtor’s assets are sold to pay the debtor’s debts (the money the debtor owes to creditors).  Sometimes that actually happens.  Most often it does not, because when the debtor’s exempt property is taken off the “bankruptcy table”, there is nothing left to liquidate (that is, to sell) to generate the money to pay the debt (often referred to as a zero asset case).  The end result is that in many Chapter 7 bankruptcy cases, the bankruptcy discharge wipes out all of the debtor’s pre-petition debt, and creditors typically obtain nothing unless, as shown below, the creditor is secured.

In a Chapter 13 bankruptcy, a debtor with regular income commits to making regular payments to the debtor’s creditors over the course of a 3-5 year plan.  It allows the debtor to pay all of his/her creditors all of the money owed, some of the money owed, or none to some and some to others.  In exchange, upon successful completion of the plan, the debtor receives a broader discharge than a Chapter 7 debtor.

How Often Can a Debtor File Bankruptcy?

A debtor can file a petition every single day but in order to receive a discharge of his or her debts, in a Chapter 7 case there must be eight years between discharges, and in Chapter 13 cases, a discharge is not available to a debtor who received a discharge in a Chapter 7 case filed within 4 years prior to the current Chapter 13 case and within 2 years for a prior Chapter 13 case. 11 U.S.C. § 727 (a)(8) and 11 U.S.C. §§ 1328(f)(1) and (2), respectively.

This is important because when condominium associations face a Co-owner who has previously filed for bankruptcy protections they can, with their counsel’s help, determine whether the Co-owner will remain personally liable for the assessments and, in some instances, as seen below, whether the automatic stay takes effect.

What Happens Procedurally?

A bankruptcy case begins with the filing of a bankruptcy petition. When a bankruptcy petition is filed, an “automatic stay” immediately takes effect halting all creditors, including condominium associations, from continuing with any attempts at collection of a debt, which includes any pending legal action.  11 U.S.C. § 362.  The filing of a bankruptcy petition is considered an order of relief, granting the debtor from such collection activity by way of the automatic stay.  The automatic stay remains in place until the debtor is discharged unless otherwise lifted by the court.

If the debtor has filed for bankruptcy in the past year and that case was dismissed, then the automatic stay only last for 30 days. 11 U.S.C. § 362(c)(3). Another way of saying this is if you file a second bankruptcy within one year of a previous bankruptcy being dismissed, then the automatic stay expires after 30 days. The debtor’s attorney can file a motion to extend the automatic stay, but it may not be granted. The rule is in place to prevent a person from filing multiple bankruptcies to repeatedly stop a creditor from taking action against secured collateral.

If a debtor files a third bankruptcy in one year then no automatic stay goes into effect and the creditors are free to continue collection activity unless the Bankruptcy Court enters an order reinstating the automatic stay. 11 U.S.C. § 362(c)(4). The debtor’s attorney may schedule a hearing to determine if the court will extend the automatic stay. If the court finds that a debtor is abusing the bankruptcy system by filing too many bankruptcies or not following through with the bankruptcies they do file; the court may enter an order prohibiting the debtor from filing any more bankruptcies for a period of months.

In Chapter 7 cases, the debtor will file a number of schedules and documents that sets forth his/her assets, debts, income and expenses, including a Statement of Intention that advises what the debtor intends to do with the property to which there is secured debt. Under the Michigan Condominium Act, MCL 559.101, et seq., the condominium assessments unpaid together with interest, collection and late charges constitute a lien on the condominium Unit.  See MCL 559.208. The Statement of Intention will reveal whether the debtor intends to keep his/her Unit or surrender it to the mortgage company.   No Statement of Intention is required for Chapter 13 filings.

In Chapter 13 petitions, the debtor will file a Chapter 13 Plan that will show three things: (1) what category of creditor your association is proposed to be[1], (2) whether the debtor agrees to make post-petition assessment payments as they fall due, and (3) whether the debtor intends to abandon the property in your association.

What Steps Cannot be Taken?

Once the condominium association receives notice of the Co-owner’s bankruptcy filing—whether the debtor filed a Chapter 7 or 13 petition—the Association cannot continue to call the debtor, send infractions to the debtor, impose fines for violations, ask for a payment, lien the debtor’s Unit, sue the debtor in court, take judgments against the debtor, issue writs of execution against the debtor, levy execution against the debtor’s personal property, foreclose and sell the debtor’s unit or otherwise take any action to collect on a debt.  Additionally, for Chapter 13 filings, the Association cannot proceed against joint co-owners because Chapter 13 filings also contain a special automatic stay provision that protects co-debtors, even if they have not filed for bankruptcy protection. 11 U.S.C. § 1301(a).

What Steps Should be Taken?

 Chapter 7
In a Chapter 7 case, the condominium association must examine and review the Statement of Intention to determine whether the Co-owner is keeping or surrendering the Unit.  If the Co-owner is keeping the Unit, he/she will pay any pre-petition delinquency and will pay the condominium assessments going forward as though he/she had not filed bankruptcy.
If the debtor is surrendering the Unit, the association’s counsel should contact the debtor’s counsel to confirm and ensure that the Co-owner will make his/her post-petition assessments.  Under the Bankruptcy Code, the debtor remains personally liable for condominium assessments arising after the Chapter 7 bankruptcy petition date and continuing for so long as the debtor owns the property. 11 U.S.C. § 523(a)(16).

In those instances where the debtor has already lost ownership of his/her Unit due to a foreclosure sale, either prior to his/her bankruptcy filing or soon after his/her bankruptcy filing, there will be no post-petition assessments owing or the amount owing may not be economically worth pursuing.  The association should always monitor the bankruptcy case to confirm that the debtor has received a Discharge Order. It is the Discharge Order that forbids the association from attempting to collect debts that were discharged through the bankruptcy.  If the case is dismissed, the association is entitled to proceed against the entire delinquency because the dismissal is the same as the bankruptcy case never being there.

Chapter 13
In a Chapter 13 case, in order to determine a debtor’s intentions as to the Unit in a Chapter 13 bankruptcy, one must examine the debtor’s Chapter 13 Plan.  If the debtor acknowledges the condominium association’s secured status by listing the association for payment in Class 2, 3 or 4 of the Plan, then the association’s claim will be deemed secured and the Plan will provide for payment in full of the association’s claim.  If the debtor does not provide for payment in full plus interest, plus monthly payments after the bankruptcy as they fall due, the association can object to the confirmation of the plan.  The usual result is that the debtor amends the Plan to provide for proper payment in full.

If the debtor lists the association in Class 5 of the Plan, then the association will be treated as a general unsecured creditor for pre-petition debt but the debtor will be responsible for post-petition assessments so long as the debtor retains an ownership interest in the Unit.  Maple Forest Condominium Association v. Spencer (In re Spencer), 457 B.R. 601 (E.D. Mich. 2011) (post-petition accruals were not discharged because, under local law, they arose under a covenant running with the land; reversing the decision to the contrary by the bankruptcy court).

Whether the homeowners association is treated as a secured or unsecured creditor, the association should timely file a Proof of Claim to ensure that the proper amount due and owing to the Association is paid through the Plan.  Moreover, it allows the association to object to the confirmation of the Plan until the delinquency amount and/or misclassification of the association’s claim (the debtor lists the association as unsecured when in fact it is secured) are correct.  If a timely Proof of Claim and/or an Objection is not filed, the association will be stuck with the debtor’s number and/or classification of the association’s claim.  If the association does not timely file an unsecured Proof of Claim, in such an instance, it will obtain nothing from the Chapter 13 Plan.

If during the term of the Plan, the debtor fails to pay post-petition assessments, the association has the right to request the bankruptcy court to dismiss the debtor’s bankruptcy or relief from stay.  Relief from stay is a motion presented to the court advising the Court that the association is not adequately protected (not being paid on time after the bankruptcy filing) and requesting that the association be free to proceed with foreclosing on its lien.  Because Chapter 13 bankruptcies are more complex (and therefore, more expensive), debtors will typically make arrangements to cure the post-petition default so that the bankruptcy remains in effect.

Summary of Debtor’s Responsibilities

In Chapter 7 cases where the debtor is surrendering the Unit, if the debtor is granted a Discharge Order, the discharge injunction forbids the Association from attempting to collect the pre-petition assessments.  However, the debtor will be responsible for post-petition assessments so long as he/she has an ownership interest in the Unit. In Chapter 7 cases where the debtor is keeping the Unit, the debtor will be responsible for both the pre and post-petition assessments.
In Chapter 13 cases where the debtor is surrendering the Unit, if the debtor is granted a Discharge after completion of the Chapter 13 plan, the Association will not be able to collect the pre-petition assessments but the association may have received payments towards the delinquency during the Plan term.          In Chapter 13 cases where the debtor keeps their Unit, the Association’s pre and post-petition assessments are paid by the Trustee’s office during the term of the Plan.
In limited circumstances not dealt with in this article[2], the Association’s secured debt is not affected by the discharge.  That is because the Association continues to have a lien against the debtor’s property.  And even though the debtor cannot be compelled to pay the debt, the Unit can be sold to satisfy the entire obligation to the Association.  And usually that results in the debt being paid, whether it arose before or after the bankruptcy was filed.


If the condominium association protects itself by timely filing its lien against the unit, it will in most cases not be affected by a Co-owner’s bankruptcy, provided the debtor retains the property.  This is because, despite the bankruptcy, the association will still be able to compel payment by foreclosing its lien.  However, if the debtor surrenders the unit, however, it is more likely that a mortgage holder senior to the association would foreclose itself, consequently wiping out the condominium association’s lien.

Accordingly, it is important for the association to seek the assistance of experienced professionals when faced with a co-owner who has filed for bankruptcy.

[1] Class 1 – creditors entitled to priority over all other creditors, such as the Chapter 13 Trustee, the debtor’s attorney, and the taxing authority; Class 2, 3 and 4 are all derivations of creditors who the debtor acknowledges are holding secured creditor status.  The first, second and other mortgage holders will be seen in Class 2.  Usually, the condominium association will be there as well. Class 5 are unsecured creditors.
[2] For example, see blog post on Lien Stripping and Bankruptcy.

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Kevin Hirzel is the Managing Member of Hirzel Law, PLC. Hirzel Law has offices in Farmington, Grand Rapids, and Traverse City, Michigan with a fourth office location in Chicago, Illinois. Mr. Hirzel focuses his practice on condominium law, homeowners association law, and real estate law. He is a fellow in the College of Community Association Lawyers (“CCAL”), a prestigious designation given to less than 175 attorneys in the country. Mr. Hirzel formerly served on the CCAL National Board of Governors and is a former member of the Community Associations Institute’s (“CAI”) Board of Trustees, an international organization with over 40,000 members worldwide that is dedicated to improving community associations. Mr. Hirzel has been recognized as a Leading Lawyer in Michigan by Leading Lawyers, a distinction earned by fewer than 5% of all lawyers licensed in Michigan. He has been named a Michigan “Rising Star” in real estate law by Super Lawyers Magazine, a designation is given to no more than 2.5% of the attorneys in Michigan each year. Mr. Hirzel was also named as a “Go-To-Lawyer” in condominium and real estate law by Michigan Lawyer’s Weekly. Hirzel Law was also voted the best law firm in Metro Detroit in the Detroit Free Press Best of the Best awards. He is the Co-Chairman of the State Bar of Michigan’s Real Property Law Section Committee for Condominiums, PUDs & Cooperatives. Mr. Hirzel has authored numerous articles on community association law for publications such as the Michigan Community Association News, Michigan Real Property Review, Macomb County Bar Briefs and the Washington Post. He is also the author of the first and second editions of “Hirzel’s Handbook: How to operate a Michigan Condo or HOA”, which is available for purchase on Mr. Hirzel has been interviewed on community association legal issues by various media outlets throughout the country, such as CBS, CNBC, Common Ground Magazine, Community Association Management Insider, the Dan Abrams Show on SiriusXM Radio, the Detroit News, Dr. Drew Midday Live on KABC Radio, Fox Business News, Fox News,, the Law & Crime Network, Michigan Lawyer’s Weekly, NPR, WWJ News Radio and WXYZ. Mr. Hirzel is a dynamic speaker and frequently lectures on community association law throughout Michigan, as well as nationally at the CAI National Law Seminar, and is a two-time winner of the best manuscript award at the CAI National Law Seminar.

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