What Happens if a Homeowners Association Goes Bankrupt?

Most homeowners belong to homeowners’ associations, also known as condominium corporations.

These associations handle everything from general maintenance, setting rules for landscaping and garbage pickup to arranging community events and member recognition awards. Just like any other organization that runs on money, an HOA can go bankrupt, especially if it mismanages its funds over time.

HOA bankruptcy usually occurs due to poor financial management, theft (via fraud or embezzlement) or difficult economic times. If the members cannot afford to pay the dues they can bring down the association. Poor board management decisions are the most common issue of the three, but a downturn in the economy may also cause numerous foreclosures to occur. This can lead even a well-run HOA to lack the revenue necessary to continue its operations.

HOAs are funded by assessments in the form of monthly dues charged to all homeowners in the association. The only way revenue can increase is by raising the monthly dues or a specail assessment. If the HOA’s expenses outweigh revenue, it will quickly begin to take on debt, which sooner or later will become more than it is able to sustain.

Members often begin suspecting problems with the HOA’s financial stability when the board begins withholding certain financial information from its members or having closed meetings solely for discussing finances. HOA boards should always be willing and able to disclose its financial situation—if not, members could be justified in their concerns.

Filing for Bankruptcy as a Homeowners’ Association

In most cases, an HOA will file for bankruptcy under Chapter 11. Rather than liquidating assets to pay off creditors, as happens under Chapter 7, this form of bankruptcy involves reorganizing financial management, starting with a freeze of liabilities. Next, the HOA discloses all its assets and income streams to a bankruptcy court.

As the bankruptcy process moves ahead, the HOA continues to perform most of its day-to-day financial management tasks, though all big decisions must be approved by the court. Once the court and HOA have agreed on a repayment plan, the HOA may continue to manage its finances under the supervision of a court-appointed trustee until it is once again able to function outside of bankruptcy.

If a trustee is appointed by the court, the trustee will oversee a variety of financial management activities, including financial reporting and select decisions. The trustee has the power, in severe cases, to order the seizure of assets to ensure the HOA follows the directions of the bankruptcy court.

Are There Alternatives for HOAs?

A well-managed HOA will rarely get close to the point of bankruptcy. However, if an HOA does fall on difficult financial times, there are a few alternatives to bankruptcy, including careful borrowing, building up a savings and simply communicating better with members regarding financial matters.

For more information on the bankruptcy process for homeowners’ associations, consult a trusted Denver bankruptcy attorney with Long & Long, P.C.