Lien Stripping and Bankruptcy [1-20-2015]

Lien Stripping and Bankruptcy
By Ronald Scott Kaniuk, Esq.

In the event a homeowner does not pay their regular maintenance fees to their homeowner or condominium association, the association is given the power to file a lien to secure those unpaid assessments. The association can foreclose on the lien or receive payment when the bank forecloses on its’ senior lien. However, the best collection efforts may be thwarted if a homeowner files for bankruptcy.

Most frequently, the homeowner files a petition under Chapter 7 (Liquidation) or Chapter 13 (Personal Reorganization). Though in some circumstances, the homeowner may be a family famrer (thus eligible for Chapter 12) or the assets/debts may exceed the Chapter 13 limits (thus requiring the homeowner to file a Personal Chapter 11). However, for purposes of this discussion, we will limit ourselves to Chapter 7 and Chapter 13 Cases.

Regardless of what chapter bankruptcy the homeowner files, the automatic stay will immediately go into effect, halting any and all collection efforts. No further action can be taken until either the bankruptcy is discharged (the case is over) or the foreclosing party (the lender and/or association obtains relief from the automatic stay.

In a Chapter 13 case, the homeowner will need to propose an individual plan of reorganization to repay their secured debts in full and to pay a minimum amount to unsecured creditors (based on income and ability to pay). The association will be a secured creditor by virtue of the previously-filed lien. However, if the property is worth less than the amount of the first mortgage, then the debtor will be able to strip the lien—turning it from a fully secured lien into a fully unsecured lien.

Prior to 2012, the result was different in Chapter 13 cases. There, the homeowner would receive a discharge of their debts, but the association lien would remain valid as against the property. However, that changed with the 11th Circuit’s decision in McNeal vs. GMAC Mortgage, LLC (In re McNeal), 735 F.3d 1263 (11th Cir. 2012). Now, a homeowner can file a Chapter 7 petition, strip down the association lien (based on the same analysis as to whether the property is worth less than the first mortgage) and keep the property by paying the going-forward assessments. The 11th Circuit decision is the minority viewpoint nationwide, and the United States Supreme Court has agreed to hear arguments about this issue in Bank of America, N.A. v. Caulkett,v. Caulkett, which is now pending on appeal. Hopefully, the United States Supreme Court will explain that lien stripping in Chapter 7 is not permitted, keeping association liens alive after bankruptcy proceedings and thereby providing the association a better chance of collecting past due assessments!

1-If the Safe Harbor provisions apply in a Bank Foreclosure, then the Association’s recovery from the Bank will be limited to 12 months of maintenance payments or 1% of mortgage, whichever is less.