Until recently, if you owed homeowner or condo association dues or assessments, even if you filed for Chapter 13 bankruptcy and no longer lived in the home, you could end up being on the hook for association fees until such time as the lender forecloses on the property or you were no longer title owner. But a new decision by the Ninth Circuit Court of Appeals is offering relief for property owners, some of which had racked up thousands of dollars in fees for condo or homeowner’s associations on a property that had long since sat unoccupied.
The case, Goudelock v. Sixty-01 Association of Apartment Owners, No. 16-35384 (9th Cir. July 10, 2018), started way back in 2009, in Redmond, WA, when Penny Goudelock ceased paying her condo dues. In 2011, Ms. Goudelock moved out, filed for Chapter 13 bankruptcy and surrendered her unit as a part of her Chapter 13 plan. The condo sat unoccupied until it the lender finally foreclosed in 2015. Prior to filing for Chapter 13, Ms. Goudelock had amassed more than $18,000 in unpaid dues, and those continued to mount at a rate of nearly $400/mo for nearly 4 years.
In 2015, Sixty-01 petitioned the Bankruptcy Court for a determination that the dues accumulated after Ms. Goudelock filed for Chapter 13 would not be discharged and that they constituted a personal obligation that Ms. Goudelock should remain responsible to pay after her bankruptcy. Originally, the bankruptcy and district courts held for the condo association.
However, the Ninth Circuit Court of Appeals decided to take a look at the case, stating that post-petition assessments for condo association fees had never been addressed by any circuit level court with respect to a Chapter 13 case, although two other circuits have reviewed dischargeability of association dues in Chapter 7 cases.
Upon review of Ms. Goudelock’s case, the 9th Circuit ruled that her personal obligation to pay the dues is dischargeable in Chapter 13 bankruptcy because the Bankruptcy Code does not specifically except such a debt from discharge under 11 USC §1328 and the Court was not persuaded by Sixty-01’s various other arguments. Chapter 13 provides a broader discharge than a Chapter 7 bankruptcy, so a Chapter 7 filer will remain responsible for post-filing homeowner’s dues or assessments until no longer on title.
What does this mean for you?
Prior to this latest ruling, you were personally responsible for any accrual of homeowners’ or condo association dues or assessments, even if you no longer lived in the property and even if you had filed for Chapter 13 bankruptcy until such time as you were no longer the title owner of the property. Now, if you own a condo or property with homeowners’ association obligations, you can file for Chapter 13 bankruptcy and not be personally responsible for HOA dues assessed after you file your petition on a property you wish to surrender. Keep in mind that any pre-petition dues will be treated as an unsecured debt and your homeowners or condo association will be added to the list of general creditors. The association does remain able to pursue the property through foreclosure.
The Court correctly interpreted the spirit of a Chapter 13 filing as a way to discharge debts, and essentially give a debtor a fresh start. If you have questions about unpaid condo or homeowners’ association fees, we would be happy to discuss your situation and options with you.
Once a Chapter 13 bankruptcy is filed, a secured creditor cannot repossess its collateral as a result of the protection that occurs through the Bankruptcy Code’s automatic stay while the automatic stay remains in place.
If behind on vehicle payments, those missed payments typically do not have to be caught up when a Chapter 13 bankruptcy is filed and a new payment schedule through a Chapter 13 plan commences within 30 days of the bankruptcy filing.
Chapter 13 allows for the interest rate on a vehicle loan to be altered. Depending on the contract rate of interest, there may be a significant reduction in interest available through a Chapter 13 plan. Additionally, it is possible to alter or reduce the amount of the monthly installment payment that is distributed monthly to the vehicle lender.
Where a vehicle was financed more than 910 days before filing, Chapter 13 plans can modify the overall amount that has to be repaid a secured creditor depending on the vehicle’s value. If the vehicle is worth less than what is owed on it, it may be possible to repay only the fair market value of the vehicle (which is commonly referred to as a “cramdown”) plus reasonable interest. The vehicle lender’s claim is split to be repaid as secured to the extent of the vehicle’s value plus interest and the balance of the claim is treated as unsecured. Whether the unsecured portion of the claim is repaid any specific amount, depends on the terms of the plan, and the unpaid balance is dischargeable at plan completion. Even where vehicles were financed within 910 days of bankruptcy, a portion of the secured creditor’s claim may be objectionable and subject to reclassification depending on the circumstances.
Chapter 13 plans often repay secured creditors ahead of other creditors and plans can rank or prioritize disbursements that occur to creditors.
Chapter 13 can help someone who has been struggling with vehicle payments because the plan can change the repayment terms on payment amount and interest rate to more affordable amounts, payments that may have been missed before bankruptcy do not have to be made up, and in many cases, it is possible to reduce the overall amount that needs to be repaid based on a vehicle’s value. Basically, Chapter 13 can give someone a way to repay less than a vehicle contract would otherwise require.
In comparison, because a Chapter 7 is not a reorganization bankruptcy, it does not offer as many options to someone struggling to keep a vehicle unless reducing a person’s unsecured debt load through a Chapter 7 bankruptcy is enough for a person to then be able to afford car payments. Otherwise, the options available to a person filing Chapter 7 are to surrender the vehicle, redeem the vehicle, or reaffirm the vehicle loan. By surrendering, a person gives up the vehicle but has no financial liability to the creditor assuming a successful discharge, redeeming requires a one-time lump-sum payment equivalent to the vehicle’s fair market value following Court approval, and reaffirming requires an agreement be filed with the Court before discharge. When a vehicle loan is reaffirmed, if payments are not made in the future and the vehicle is repossessed, the debtor remains liable for any deficiency. Chapter 13 may offer more flexibility to someone struggling to retain a vehicle than a Chapter 7 or other options might offer.
When someone owes multiple mortgages on a property, even where the property is residential property, it is worth considering whether a Chapter 13 bankruptcy might provide that person the ability to strip off a junior mortgage lien. This requires evaluating whether the property value is insufficient to secure the junior mortgage(s). A debtor in a Chapter 13 proceeding may strip off a junior mortgage lien when the debt owed on a senior mortgage lien exceeds the value of the collateral. The gross value of the property without deduction for hypothetical costs of sale or other deductions must exceed the amount owed to the senior position lien holder. For lien stripping of a residential mortgage relief to be available, there cannot be a dollar in equity for the junior mortgage to attach to so that the junior position mortgage is wholly unsecured.
When a Chapter 13 debtor has stripped a junior mortgage lien, a claim for a stripped off mortgage is treated as an unsecured obligation to be repaid per the terms of a Chapter 13 plan along with similar unsecured claims such as medical debt or credit card claims (sometimes repaid at 0% if that is what the Chapter 13 plan provides to unsecured creditors). The Courts have ruled that even a Chapter 13 debtor who may not be eligible for a Chapter 13 discharge due to a prior filed discharged bankruptcy within relevant time periods may utilize Chapter 13 for lien stripping of a wholly unsecured mortgage if other eligibility and requirements of plan confirmation are met.
However, no such junior mortgage relief is available to a debtor in a Chapter 7 case because the Supreme Court in Caulkett has confirmed that Dewsnup v. Timm does not permit lien stripping in a Chapter 7 bankruptcy. But, Dewsnup is inapplicable to Chapter 13, according to In re Enewally, 368.F.3d 1165, 1170 (9th Cir. 2004). Lien stripping is permitted in Chapter 13 and the operative authority includes 11 USC §1322(b)(2), Nobelman v. American Savings Bank, 508 U.S. 324 (1993), In re Zimmer, 313 F.3d 1220 (9th Cir., 2002), and In re Lam 211 B.R. 36 (9th Cir BAP, 1997). Therefore, Chapter 13 bankruptcies can provide a valuable tool to some individuals which will allow them the ability to retain their property without being saddled long-term with a junior mortgage on a property that lacks value to secure that junior mortgage.
Criminal fines or restitution debts are not dischargeable in either Chapter 7 or Chapter 13, but Chapter 13 can provide a way to propose a plan to repay all or a portion of criminal fines over three to five years and it may be possible to specially classify such debts to repay criminal fines ahead of other unsecured claims under certain circumstances.
If a driver’s license has been suspended or revoked because of the failure to repay fines, the filing of a Chapter 13 bankruptcy will allow a driver’s license to be reinstated. If a license has been suspended or revoked as a result of DUI, Habitual Traffic Offender, or for some criminal sentence, although the filing of a Chapter 13 may not be effective to reinstate a license there still may be benefits to filing as to other debts.
If Court or traffic fines have resulted in a driver’s license suspension or revocation, it will be important to obtain a copy of a complete driving transcript report from the DMV so that all fines or obligations that are causing a problem with a driver’s license can be included and listed on the Bankruptcy schedules.
A successful Chapter 13 plan allows a Debtor to reinstate a delinquent mortgage as if no default had occurred. The Chapter 13 Trustee will verify the status of a mortgage as reinstated before the completion of a plan. When a Chapter 13 debtor receives a discharge, a permanent injunction against collection on amounts addressed through the Chapter 13 plan goes into place. The willful failure of a creditor to have properly credited payments received under a confirmed Chapter 13 plan where there has been no default by a Debtor constitutes a violation of the discharge injunction if such action causes material injury to a Debtor. A party who knowingly violates a discharge order can be held in contempt and sanctions awarded. The Ninth Circuit has applied a two-part test for a Debtor to prove in determining whether sanctions are justified: (1) the creditor knew the discharge injunction was applicable and (2) the creditor intended the actions which violated the injunction.
As to the first prong, the Court must find actual knowledge in the context of contempt before a finding of willfulness can be made. Meaning, the Court must find evidence that the creditor was aware of the discharge injunction and that it applied to its claim. As to the second prong concerning a party’s intent, the focus is not on a party’s belief or intent, but on determination of whether a party’s conduct complied with the order at issue. If the Court finds a party has willfully violated the discharge injunction to a Debtor’s detriment, the Court may award compensatory damages, punitive damages, and attorney’s fees to the Debtor. Therefore, a Chapter 13 Debtor has protection to know once a delinquent mortgage has been cured through a confirmed Chapter 13 plan, that a Debtor is absolutely entitled to a fresh start going forward.
For tax liability to be dischargeable in bankruptcy, i.e. no longer considered a personal liability, at least the following three rules must be met:
Please note that if taxes are not dischargeable in a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may provide meaningful protection to a person owing tax debt. There has been much litigation across the country in the past several years concerning discharge of tax liability in Chapter 13 cases and recent court decisions have changed the interpretation of tax claim treatment in Chapter 13 cases. The US Supreme Court was asked to hear such a case but recently declined to do so.
A successful Chapter 13 Plan can provide for repayment of secured and unsecured priority tax liability to the IRS and allow for discharge of penalties, interest on penalties, and other eligible general unsecured tax debt. In addition, priority taxes paid through a Chapter 13 Plan will not accrue additional penalties.
Liability on late-filed tax returns are very likely never dischargeable without a very good reason. However, the debt can still be managed through a Chapter 13. Where there is non-dischargeable tax liability, the accruing interest is also non-dischargeable but a Chapter 13 plan may be able to provide to pay that interest to the IRS in some circumstances.