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How Will Bankruptcy Effect an HOA Loan?

stephen polinsky on Feb 9, 2009 8:27:00 PM

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Bankruptcy

Although the HOA Loan or Condo Asssociation Loan provider can minimize the risk, the tender must always ask itself the question, what if the condo association declared bankruptcy? Instances of community association bankruptcy are few, but there is some precedent. In the recent case of In re Condominium Association of Plaza Towers South Inc., 43 Br. 18 (S.D. Fla., Aug. 30, 1984), a U.S. Bankruptcy Court held that a condominium association may indeed file a Chapter 11 bankruptcy for reorganization.

However, almost no foreseeable circumstances would a condominium association be able to file a Chapter 7 for liquidation. The association must continue its statutory requirements to maintain the property. Furthermore, the record owners will continue to be legally responsible for the assessment whether or not units are inhabited. In fact, the lender should consider the association more in terms of a governmental unit, such as a city or county, that declares bankruptcy. A government has taxing power and that taxing power can be used to raise revenue to settle debts. There is also indication from other case law involving community associations that a court would order the association to look to its unit owners in the form of increased special assessments to settle its debts. I conclude, therefore, that the chances of a community association filing for bankruptcy are very small. Even if a bankruptcy did occur, it would be a Chapter 11 reorganization which would be resolved in a relatively short time because a court would look to the assessment or taxing power of the association to place the condo association back on a sound financial footing.

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