Can I Include My Homeowners Association Fees or Condo Fees in My Bankruptcy?

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When you file a bankruptcy petition with the court, you must include every debt you have — even non-dischargeable debts — in your petition. You can’t leave debts out. You must list student loans and certain tax debts, even though they’re not dischargeable. The day you file the bankruptcy petition is called the petition day, which is a key measuring stick. Anything prior to that is prepetition; anything after that is postpetition. Condo association fees and HOA dues are dischargeable, as long as they are prepetition dues.

If you’re doing a Chapter 7, any HOA dues that you incur after the day that you file the bankruptcy papers will not be dischargeable, while HOA dues that you incurred prior to filing will be discharged.

In a Chapter 13, you don’t necessarily have to pay the dues in full. This is significant because of an issue that arose in the last housing crisis back in 2008 to 2010 or so, and I suspect the same issue might rear its ugly head in the not-too-distant future due to the pandemic.

When the last housing crisis hit, people who found themselves suddenly underwater by large amounts of money couldn’t make their mortgage payments. They were stuck with negatively amortized loans (which I’ll discuss later), and wanted to walk away from the house in bankruptcy. Normally, that sounds like a pretty good idea. If you can’t make the payments and you’re underwater, walk away from it. But is the lender, or the mortgage company, required to take possession of the house? Can you force somebody to the lender to take the house back?

These questions created an interesting problem. It turns out you can’t force a lender to take the house back. People would surrender their house to the mortgage company and have their mortgage liability and prepetition condo fees or HOA dues discharged in the bankruptcy. But who is on the hook for the postpetition HOA dues that continue to accrue? If the mortgage company refuses to take possession of the house, then the debtor is still responsible for those postpetition dues until such time as the title transfers from the debtor to somebody else. And this could go on for a couple of years.

During that time, I advised my clients to continue living in the house, but forego paying their mortgage (their personal liability would be discharged in the bankruptcy). If they continued to pay their HOA dues and thought of them as reduced rent, they could take the money they would have spent on mortgage payments and use it to move somewhere else once the foreclosure sale finally happened. Otherwise, that postpetition HOA due liability could have a sharp edge to it.

When the housing crisis of a decade ago occurred, people had been buying houses like crazy. The mortgage company’s perspective was that lending was a safe bet; they were willing to relax their standards. Instead of requiring 20% down, they were letting buyers put 10% down, 5% down, or 0% down. There were even people buying homes for negative 25% down, meaning they were borrowing 125% of the value of their house. The rationale was that, since the demand was so high, prices were going to just keep going up and up, and very shortly thereafter, the person would have a lot of equity, making the loan amount a nonissue. Now, if you’re borrowing 125% of the value of the house, your mortgage payments are going to be quite high, so the banks were accommodating there, as well, and let people have negatively amortized mortgages. Let’s explore that concept further.

Normally, when you have a mortgage, your monthly payments have two components: the interest and the principal. (To illustrate the concept of negative amortization, we are ignoring taxes and insurance.) When you first start paying, it’s practically all interest because the interest is being calculated on the current balance — which is huge when you first take out the mortgage. As time goes on, the interest comes down, and more and more of the payment is attributable to principal. But suppose you’ve borrowed 125% of the value of the house. If you can’t afford the fully amortized payment and decide to pay the interest only, you’re essentially just a renter with no mobility. You won’t be able to move unless somebody buys the house from you. If you decide to use negative amortization, meaning you pay less than the full interest, the interest you don’t pay now gets added to the principal balance, which just keeps growing. The banks have a trigger point of 115% of the original loan balance, and once the principal grows to 115% of the original loan amount, the bank ends the negative amortization. You go from paying a reduced negatively amortized amount to paying the entire fully amortized payment, plus a premium to catch up. This was a major factor in the waves of foreclosure.

I think this could repeat itself soon. Under various new federal statutes, there is mortgage forbearance, under which people have not been making their mortgage payments—and have not been making them for a while now. Though the CARES Act did have a provision that prevented the banks from tacking on additional interest, the bill is going to come due at some point. If you have 20 years still on the mortgage and you don’t have a job and this persists for a while, you’re going to face a foreclosure sale eventually.

When these waves of foreclosure start to hit, I suspect we’re going to see the problem with the HOA dues and the condo dues come up again. Housing prices will collapse because the law of supply and demand applies to real estate every bit as much as anything else. When you have a wave of foreclosure, suddenly you have a large increase in supply without a concomitant large increase in demand. Then, prices will go down and people will walk away from their homes in bankruptcy cases. Many of them will face postpetition accrual of their HOA dues.

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