An HOA, or homeowners association, is funded from the homeowners in the community. The residence owners pay a monthly fee and the funds are used to run the association much like a business. When the HOA funds are mismanaged, the association could face bankruptcy. When a homeowner’s association goes bankrupt, the reason is likely mismanagement of funds, theft, or embezzlement. That’s why it’s important to keep all HOA members on their toes with regular elections in the presence of an inspector of elections who will ensure compliance with laws and regulations for California HOA elections.
The revenue of the HOA can also decrease because of home foreclosures, since this means there won’t be as many payment members in the community. One of the first signs of trouble to look out for is when the HOA starts withholding information from members.
What Happens When an HOA Goes Bankrupt
A homeowners association can file for Chapter 11 bankruptcy. This type of bankruptcy allows the organization to reorganize their funds and management systems. With Chapter 11, the HOA has to disclose all assets and income streams and the organization’s liabilities are frozen.
During the Chapter 11 process, the HOA managers will stay in office, but any major decisions will have to be court-approved. The HOA will work with the courts to come up with a repayment arrangement and will be under the trustee of the court until the organization can be financially independent again.
Homeowner Asset Protection
When a homeowners association and a creditor go to court and the creditor wins, the creditor can receive all the HOA’s assets. This doesn’t necessarily affect homeowners, but some community services or amenities may be eliminated or limited in common areas of the neighborhood, such as picnic tables, swimming pools, and playgrounds. When the HOA goes into bankruptcy, collection of the property is delayed so the community can retain its assets.
HOA Reorganization
With the assistance of an attorney, an HOA may reorganize for the purpose of repaying debts and restoring the financial health of the organization. Bankruptcy payments are submitted to the Trustee of the USA. If the HOA can’t make payments to the trustee, the court will appoint a third party to oversee daily operations
It’s also a good idea for a homeowners association to implement technology into financial organization efforts. Cloud-based solutions are the next step for association management software, and it can let the leaders know who is handling certain monetary tasks.
Homeowners Association Contracts
An HOA can reject the current leases and contracts. This can directly or indirectly affect the residents who live in the community. The homeowners association can also overlook the conditions, restrictions, and covenants of the community, which means residents can lose certain rights to neighborhood facilities.
If a homeowners association files for Chapter 11 bankruptcy, the neighborhood residents won’t be able to use common areas like clubhouses, swimming pools, and hiking trails. If the HOA files for Chapter 7, some neighborhood assets may be liquidated to satisfy the debt with creditors. This also makes it difficult for homeowners to sell their residences, since new buyers won’t be able to obtain title insurance for the house.
Home Values and HOA Bankruptcy
When the homeowners association goes broke, the homes in the neighborhood are likely to decline in value. This is why many homeowners will lobby to sue the HOA for financial mismanagement.
It’s also important to know that bankruptcy for apartment complexes affects all tenants. When the homeowners association files bankruptcy for an apartment complex, the tenants are technically protected. However, they may have to take legal action to ensure they can stay in their apartments.
The HOA is the debtor in these cases, and the courts grant the organization a “stay,” which prevents creditors from demanding funds. This allows the homeowners association time to figure out a suitable way to pay creditors.
It’s important to note that in the worst-case scenarios, the government will oversee the HOA during its trying financial time. Public revenues are then spent on community maintenance. If the property is to stay under the HOA’s leadership, the organization will have to repay their debts with private funds.
