Top 5 Actions for HOA and Condo Boards After an Owner’s Bankruptcy Filing
In 2024, over 500,000 bankruptcy cases were filed in the U.S., a 14% increase from the prior year. With 2025 expected to bring even more filings, many condominium and HOA boards are facing a harsh reality: how to handle bankrupt owners while staying compliant with federal law and protecting the association’s finances.
Missteps in handling bankruptcy can cost your association thousands or worse, lead to legal sanctions. Here are five critical actions your board and property manager must take immediately when an owner files for bankruptcy.
1. Stop All Collection Efforts Immediately — Or Risk Federal Sanctions
When an owner files for bankruptcy, an automatic stay goes into effect, halting all collection efforts on debts owed before the filing. This means your association and its property manager must:
- Immediately stop sending payment notices, emails, texts, or making collection calls.
- Do not restrict access to amenities like pools or clubhouses due to nonpayment.
- Avoid issuing fines until legal counsel confirms it’s appropriate.
Don’t contact the owner about dues without a court order lifting the stay. Consult your attorney first.
2. Bankruptcy Doesn’t Automatically Erase Association Debt
Just because an owner files for bankruptcy doesn’t mean your association is out of luck.
- In Chapter 13, the owner proposes a repayment plan. You must file a Proof of Claim to receive payments on past-due and ongoing assessments.
- In Chapter 7, the owner may surrender or retain the property. If surrendered, a lien survives and you may still collect by foreclosing or receiving funds from a trustee sale.
File early, and monitor the case closely. The association’s rights depend on whether the owner is keeping or giving up the property.
3. Send Bankruptcy Notices to Your Attorney Immediately
Every bankruptcy case is unique. As soon as your association receives a notice, forward it to your legal counsel for review.
Your attorney will determine:
- What the owner plans to do with the unit
- Whether and how to file a Proof of Claim
- If the court needs to hear a Motion for Relief from Stay (e.g., to continue collections or initiate foreclosure)
Don’t guess. Let your attorney guide your response and ensure deadlines aren’t missed.
4. Zero Balance Doesn’t Mean Zero Risk
Even if the owner owes nothing at the time of filing, you must take the case seriously.
- Owners with zero balances may surrender their units during bankruptcy and stop paying.
- If your association doesn’t appear in the case, you may lose your right to collect future dues or claim a share of proceeds from a sale by the trustee.
Always monitor and respond to bankruptcy filings, even if the account is up to date.
5. Keep Sending Non-Collection Notices — Even During Bankruptcy
Bankruptcy doesn’t strip an owner of their rights as a member of the community.
- Continue sending newsletters, meeting notices, and general updates.
- Treat the owner like any other member, except when it comes to collection.
Maintain communication, but steer clear of collection-related language or demands.
When a homeowner files for bankruptcy, your board must act quickly to protect the association’s interests. Navigating the bankruptcy process requires precision and legal insight, from halting collection efforts to filing claims and understanding lien rights. One wrong move can result in lost revenue or, worse, court sanctions.
At Hirzel Law, we help boards take the right steps from day one. Our team ensures you respond properly to bankruptcy filings, submit claims on time, and avoid costly compliance mistakes. Don’t wait until it’s too late! Contact us today to learn about our collections process!
Melissa Francis is an attorney with Hirzel Law, PLC, focusing on community association law related to collections and bankruptcy. Ms. Francis received her Bachelor of Arts in International Relations from Michigan State University, James Madison College, and her Juris Doctor degree from Wayne State University Law School. Ms. Francis was an associate at Zelmanski, Danner & Fioritto, PLLC, before joining Hirzel Law, PLC. She has been a presenter at several conferences, including the 2019 Community Associations Institute National Conference in New Orleans, where she presented on Bankruptcy and Associations. Ms. Francis can be reached at (248) 478-1800 or mfrancis@hirzellaw.com.
