When you file Chapter 7 bankruptcy, you expect to wipe out your debts and get a fresh start. In some rare cases, HOA (Home Owners’ Association Dues) may prevent this fresh start because post petition HOA dues are not dischargeable.
Before the Great Recession, most mortgage companies would foreclose on properties as soon as they fell delinquent. Now, many mortgage companies may wait up to a year or two before they get around to foreclosing because of the back log. In the case of Sheryl Lynn Pigg, the stars lined up for a complete HOA nightmare.
In May 2010, Nashville, Tennessee suffered one the worst floods in history. Ms. Pigg’s condominium was made inhabitable as a result of this flood. With no flood insurance, she salvaged what she could and found another place to live.
After Ms. Pigg filed for Chapter 7 bankruptcy protection, Bank of America changed the locks on her condominium and posted a notice on the front window prohibiting entry. Even though Ms. Pigg had a provision in her bankruptcy petition surrendering her interest in the condominium to Bank of America, the bank chose not to foreclose. In the meantime, the HOA dues began to pile up.
To end this nightmare, Ms. Pigg’s bankruptcy attorneys filed an adversary with the bankruptcy court force Bank of America take the property. Fortunately for Ms. Pigg, the Court ordered the Chapter 7 Trustee to auction the property and to pay the HOA dues.
The ruling in this bankruptcy case is extremely rare. I think the most important factor was that the condominium was damaged by a flood and left Ms. Pigg with no option but to surrender the property to the bank. If the Court had not ordered the sale of the property, she could have been stuck paying HOA dues forever on a property that she could not do anything with. I doubt that the court would have reached the same conclusion if she had simply moved away because of a new job situation.
Any person filing Chapter 7 who wants to surrender a property to a bank must understand that they are almost always going to be held liable for future HOA dues. If possible, the best course of action is to remain living in the property and pay all HOA dues until the property is foreclosed.