When a co-owner in a Michigan condominium files for bankruptcy, can the condominium association still collect unpaid assessments? Most boards assume the answer is no. This belief is common, but not entirely correct. While bankruptcy offers some protection against collection efforts, it does not completely eliminate the condominium association’s rights. Michigan condominium associations that understand the rules, act quickly, and involve legal counsel at the right time can still recover a significant portion of what they are owed. This article explains how bankruptcy affects the collection of unpaid condominium assessments, what a condominium association must do the moment a bankruptcy notice arrives, and the most common mistakes that cost associations money they could have recovered.
Chapter 7 vs. Chapter 13: What Each Type of Bankruptcy Means for Michigan Condominium Associations
Most individual bankruptcies filed by condominium co-owners fall into one of two categories: Chapter 7 or Chapter 13. The type of bankruptcy filed has critical implications because each type treats unpaid assessments differently and requires the condominium association to take different steps to protect its interests. The first action boards should take after receiving a bankruptcy notice is to verify which chapter was filed and the filing date.
Chapter 7 – Liquidation (The “Clean Slate” Filing)
In a Chapter 7 bankruptcy case, the co-owner rasks the bankruptcy court to eliminate most of their debts in exchange for liquidating non-exempt assets. This type of filing has two main consequences for condominium associations:
- Pre-petition debt (unpaid assessments that were due before the filing date) is generally eliminated as a personal obligation. Once the court grants a discharge, the condominium association generally cannot sue the co-owner personally for those past due assessments.
- Post-petition assessments (amounts coming due after the filing date) are a different story. Under the Bankruptcy Code, 11 U.S.C. § 523(a)(16), the co-owner remains personally responsible for paying monthly assessments for as long as they still have any ownership interest in the unit. This obligation does not end when the co-owner moves out, or even when they tell the bankruptcy court that they are surrendering the property. It continues until the unit changes hands through a sale or foreclosure. A co-owner who moves out and surrenders the unit can still owe the condominium association months or years of unpaid assessments until the title transfers.
Even where pre-petition debt is discharged, the association’s lien on the unit survives. If the trustee administers assets or there is equity in the unit, an attorney should assess whether filing a Proof of Claim is appropriate to position the association to receive proceeds from a trustee sale.
In short, while a Chapter 7 discharge may eliminate pre-petition debt, post-petition assessments remain collectible as long as the co-owner retains title to the unit, even after vacating it.
Chapter 13 – Repayment Plan (“The Pay It Back” Filing)
In a Chapter 13 bankruptcy case, the co-owner keeps their property and proposes a court-supervised repayment plan, typically lasting three to five years, to repay their debts. For Michigan condominium associations, Chapter 13 can be favorable.
Pre-petition debts can be included in the repayment plan, giving the association a real opportunity to recover past-due amounts over the life of the plan, but only if the association files a Proof of Claim. A Proof of Claim is a formal document submitted to the bankruptcy court that identifies how much is owed. If the condominium association does not file a Proof of Claim, it will not receive any payments distributed through the plan.
Post-petition assessments are treated separately and are expected to be paid directly to the association each month, just as they would be under normal circumstances. Associations should not passively wait to pursue unpaid monthly assessments during an active Chapter 13 plan. If the co-owner falls behind on current assessments while the plan is running, an attorney can ask the court for permission to take collection action.
Chapter 13 can work in the association’s favor, but it requires prompt action. Missing the Proof of Claim deadline means the association misses out on recovering anything for past-due assessments, regardless of how much is owed.
The Automatic Stay and What A Condominium Association Must Stop Immediately
The moment a bankruptcy petition is filed, a legal protection called the automatic stay goes into effect. It operates as an immediate halt on all collection activity. The condominium association, like every other creditor, must cease any efforts to collect money the co-owner owed before the bankruptcy filing date. Under the Bankruptcy Code, 11 U.S.C. § 362, the following actions are prohibited from the moment the petition is filed:
- Initiating or continuing any collection communication about pre-petition debt, including phone calls, demand letters, or emails
- Filing or continuing a lawsuit to collect unpaid assessments
- Pursuing wage garnishment or bank levies
- Initiating or continuing any foreclosure proceeding on the unit
- Recording a new lien against the unit for pre-petition debt
- Restricting access to amenities such as pools or clubhouses due to nonpayment
In Chapter 13 cases, the automatic stay also extends to co-debtors (meaning other co-owners who hold title to the same unit and share liability for the assessment obligation) even if those co-owners have not filed for bankruptcy themselves. Under 11 U.S.C. § 1301(a), the condominium association cannot proceed against a co-debtor or co-owner on a pre-petition obligation while the Chapter 13 case is active without first obtaining court approval.
Violating the automatic stay, even unintentionally, can result in the condominium association being ordered to pay the co-owner’s attorney fees and other court-imposed penalties. The moment a condominium association receives a bankruptcy notice, all collection activity must stop, and the notice must be forwarded to the condominium association’s attorney as soon as possible.
When the Condominium Association Can Seek Relief from the Automatic Stay
The automatic stay is not permanent, and there are circumstances in which the condominium association’s attorney can petition the bankruptcy court to lift the stay so that the condominium association may pursue its collection remedies. This is accomplished by filing a motion for relief from the automatic stay. Common grounds for seeking stay relief in the condominium context include:
- Post-petition assessments are not being paid. If the co-owner is not paying current assessments during a pending Chapter 7 or Chapter 13 case, the condominium association can seek relief to pursue property-specific remedies against the unit, including foreclosure.
- The Chapter 13 plan has defaulted. If the debtor stops making plan payments or fails to remain current on post-petition assessments, the condominium association may move to lift the stay or seek other enforcement.
- Prior or serial filings have limited the stay. Under 11 U.S.C. § 362(c), a debtor with multiple recent filings may be subject to a limited or terminated automatic stay. Counsel should assess whether full stay protection applies whenever a debtor has a history of serial filings.
Navigating a motion for relief from the automatic stay without legal representation significantly increases the risk of violating the stay and incurring adverse outcomes. Condominium associations should involve experienced condominium counsel as soon as a bankruptcy notice is received.
Common Mistakes That Cost Michigan Condominium Associations Money
Even well-intentioned boards and property managers make procedural errors in bankruptcy situations that compromise the condominium association’s collection rights. The most common mistakes include:
- Continuing collection communications after receiving a bankruptcy notice, including sending monthly statements that reference pre-petition arrearages, which can constitute a stay violation.
- Delaying the forwarding of the bankruptcy notice to legal counsel, causing the condominium association to miss Proof of Claim deadlines in Chapter 13 cases.
- Treating all bankruptcy cases as identical, when the chapter filed, the debtor’s equity position, and the secured status of the condominium association’s lien all materially affect the available remedies.
- Failing to separately track pre-petition and post-petition assessment balances from the petition date forward, which are subject to different legal treatment.
- Assuming that having a claim against the unit automatically means the condominium association will recover money, when in fact whether and how much can be recovered depends on how much equity is in the unit, which requires an attorney to evaluate.
- Waiting too long to formally place a lien on the unit during the collection process. Once a bankruptcy petition is filed, the condominium association is prohibited from taking that step for pre-petition debt. Engaging an attorney early in the delinquency process, before any bankruptcy is filed, is the best way to preserve the condominium association’s options.
Conclusion
Bankruptcy does not eliminate a Michigan condominium association’s collection right, but it does change them, and the margin for error is small. For associations that want to protect those rights, the most important practice is simple: the moment a bankruptcy notice arrives, all collection activity must stop. The notice must go to legal counsel as soon as possible. Deadlines in bankruptcy cases are strict, and missing them, whether a Proof of Claim deadline in Chapter 13 or a window to seek relief from the automatic stay, can cost the association money it could have recovered.
Associations that engage counsel early in the delinquency process, before any bankruptcy is filed, preserve the most options and put themselves in the best position to recover what they are owed. If your condominium association has received a bankruptcy notice, or is facing a delinquency that may be heading in that direction, contact Hirzel Law to discuss how to protect your association’s collection rights.
