Homeowners or Condominium Association Fees: Nondischargeable, But Maybe It’s Not a Problem

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

June 30, 2008

Section 523(a)(16) of the bankruptcy law, as amended by the 2005 Bankruptcy Reform Act, makes homeowners or condominium association fees nondischargeable, but only if the association fees arose after the date the bankruptcy was filed, and only for so long as the debtor has an ownership interest, or some other equitable interest, in the property. A post-bankruptcy sale or foreclosure of the debtor’s interest in the property, once fully completed, ends any further accumulation of association fees.

For debtors who are keeping their townhouse or condominium notwithstanding their bankruptcy filing, the nondischargeable nature of post-bankruptcy association fees is not a problem. However, debtors who plan to surrender their townhouse or condominium in the bankruptcy are vexed by the question of what to do about post-bankruptcy association fees.

A foreclosure can take many months to be completed. Even if the debtor has vacated the property, he or she still has an ownership interest, which results in association fees accumulating until the lengthy foreclosure process is finished. The resulting debt for association fees, which arose after the filing of the bankruptcy case, but prior to completion of the sale or foreclosure, are nondischargeable.

The question is, even though post-bankruptcy filing association fees are nondischargeable, so long as the fees arise while the debtor still owns the property, will this really be a problem for the debtor? Surprisingly, in many cases, the answer is no.

The reason the problem of nondischargeable association fees often evaporates lies in the nature of the foreclosure process. After completing a foreclosure sale, the lender will of course desire to sell the property. In order to convey clear title to a new buyer, the lender will need to pay off any outstanding liens or encumbrances on the property. Under the law of most states, association fees are a lien upon the real estate. This means the lender will pay off any association fees which are still outstanding at the time the lender sells the property, in order to complete the sale to a new buyer after foreclosure.

Once the lender pays the association fees, the debtor’s debt to the association no longer exists. The debtor simply owes more money to the lender, due to the lender having paid the association fees. Because any claim the lender has against the debtor arose before the bankruptcy was filed, by virtue of the pre-bankruptcy promissory note and mortgage originally signed by the debtor, the lender cannot pursue the debtor for the post-bankruptcy association fees. The lender’s claims against the debtor are all based upon the pre-bankruptcy agreements with the debtor, which were discharged.

If the lender perceives that the only rights it has against the debtor are based upon the pre-bankruptcy agreements with the debtor, which have been discharged, the lender will conclude it has no recourse against the debtor for the post-bankruptcy association fees. The result will be that the debtor never has to pay the post-bankruptcy association fees, even though the bankruptcy law that says such fees are nondischargeable.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: February 20, 2013