HOAs cause their own set of problems for homeowners.  Last week I wrote an article about the basic of HOAs and the need to elect a competent Board of Directors to maintain property values and a quality way of living  In continuing my discussion about HOAs, it is important for homeowners to understand the ramifications of failing to pay HOA assessments.

The HOA can’t come after me, right?

As an Arizona real estate lawyer and Arizona bankruptcy lawyer, it is not uncommon for homeowners to tell me that they have stopped paying their HOA assessments because they have already decided to let their home go into foreclosure.  There is a common misconception that the only right an HOA may have for unpaid assessments is to record a lien against the property.  When the property is worth far less than the outstanding mortgage balances, a debtor may believe that the HOA’s lien is worthless because it is going to be wiped out once the lender forecloses.  The homeowner erroneously concludes that the HOA really can’t do much in this underwater real estate market.

Not so.  It is true that once the lender forecloses, the HOA’s lien is wiped out.  However, most CC&Rs allow the HOA to also sue the debtor to recover the unpaid assessments.  The end result is that the HOA receives a judgment (plus penalties, interest and attorneys’ fees), allowing the HOA to garnish the homeowner’s wages, bank accounts and other non-exempt property.

So, when can I safely stop paying HOA fees?

A homeowner’s obligation to pay HOA assessments does not cease until title is transferred via a sale or a foreclosure.  Because it takes time for a bank to foreclose, it is not uncommon for the homeowner to continue to be liable for HOA assessments many months after the homeowner stops paying the mortgage.  There is no way to force a bank to foreclose sooner rather than later.

But if I file bankruptcy, I don’t have to pay, right?

An Arizona bankruptcy lawyer will commonly advise that although all unpaid HOA assessments accruing prior to fling Chapter 7 or Chapter 13 bankruptcy are discharged, those accruing after the filing date are still the responsibility of the homeowner until a foreclosure or short sale is consummated.  The foreclosure could take even longer once a debtor files for bankruptcy because the lender is required to lift the automatic stay first before continuing the foreclosure.

I’m doomed!  How can I unload this house?

I may advise a homeowner to wait until the foreclosure or short sale is complete before filing bankruptcy.  The bankruptcy filing will discharge the HOA fees that accrued prior to filing, and no future HOA assessments will be charged because the homeowner no longer owns the property.  Furthermore, it may be best for a homeowner to live in a house for free and pay the HOA assessments until the foreclosure occurs.  After all, a $200/month HOA fee that a homeowner will be responsible for until the foreclosure occurs is still cheaper than abandoning the house before the foreclosure and paying rent of $900/month in addition to the $200/month HOA assessment.  Is that taking advantage of the bank?  If the bank makes the business decision to delay the foreclosure, it is neither unreasonable nor immoral for the homeowner to remain in the house without paying the mortgage.  The bank has the full control to repossess the house, and if it wants to delay the process for whatever reason, so be it.