I have a unit in a 27 unit building. The previous board of the condo association obtained a line of credit / loan for $250K. Each unit has to pay an additonal amount each month to cover the loan payments. Unfortunately, about half of the building has stopped paying their maintenance, special assesments and loan. What happens with this condo association loan if they do not pay? How can I protect myself since I have made all the payments for my unit? Can the condo association file for bankruptcy?
First of all, consult with an attorney that is practiced in community association law and also has an active debt collection division. This combination of skills will likely yield the best level of advise.
Such matters are complex. In general, the borrower of the obligation is the condo association. The unit owner does not have a direct connection to the condo association loan in question.
Depending on state regulations, the lender may be able to act directly against the unit owner on the condo association's defaulted obligation. However, if the unit owner is not paying the association, the unit owner would not be protected from the lender getting a court judgment to step into the collection shoes of the association.
So the unit owner may or may not be protected from the lender of the defaulted condo association loan. The real problem for the unit owner is that the recovery of the defaulted debt may become an unfair burden on the unit owner so that the lender can be made whole. If 1/2 of the unit owners are in default, the special assessment that has been applied to those units will likely be lost in foreclosure. The special assessment will likely be lost because these days there is not likely to be sufficient equity in the unit for the association to recover on their lien. The defaulting unit owner is further likely to have filed bankruptcy.
Some how, the association is going to have to come up with sufficient income to support their operating expenses and the loan payments. A bank that has foreclosed on a unit is responsible for paying condo association dues. The real catch 22 is when the unit owner is current on their mortgage (no foreclosure) but refuses to pay association dues. For lack of equity in the unit, the condo association might not find it plausible to act on their lien rights and foreclose the unit owner. But, the lender that has a loan with the association directly might be suing to recover their debt. This would put the remaining 50% of the unit owners in the situation of satisfying the lender in some way.
There are dozens of different scenarios. Most are not good these days. Most states allow for a community association to file bankruptcy.
