We often hear many of the same misunderstandings about the rights of associations to collect delinquent assessments. This is a collection of four of the most common myths we hear.
"We only pay from the date of sheriff’s sale.” – Mortgage company
A foreclosing party owes assessments for the six months preceding the end of the redemption period.1 Redemption periods can range from twelve months to five weeks.2 The most common redemption period is six months, and therefore the standard practice has been for mortgage companies to claim that they only owe from the date of the foreclosure sale. Recently, it has become more common for mortgage companies to reduce the redemption period to five weeks if the unit has been abandoned. When this occurs, the mortgage company will owe some assessments that came due before the sheriff’s sale. Many mortgage companies are not aware of the requirement to pay six months prior to the end of the redemption period, and will state, incorrectly, "we only pay from the date of the sheriff sale forward.”
"I declared bankruptcy, so you can’t take any collection action.” – Homeowner
Unit owners who have their debts discharged through bankruptcy will often contact their association and ask to have their accounts wiped clean. Associations must comply with this request if the debt has been discharged through bankruptcy proceedings as it is a violation of the Federal Bankruptcy Code to attempt to collect a debt that has been discharged. The date of filing a bankruptcy proceeding is the date that all debt should be discharged through. Assessments accrued after the filing date will not be discharged by the bankruptcy and may be collected, once the bankruptcy proceeding is completed or a lift stay order is obtained.
While the bankruptcy will discharge the personal obligation of the unit owner, it does not extinguish the lien on the property. Therefore, should a unit owner declare bankruptcy, the association retains a lien on the unit for the full amount of the delinquent account.
"My mortgage was foreclosed, so I’m not going to pay my assessments anymore.” – Homeowner
This is a popular refrain from homeowners who are losing, or have lost, their units to a mortgage foreclosure. It is a misconception that if the mortgage company is foreclosing on a unit, the association has no recourse against the former owner. Assessments that are levied against a unit are a "personal obligation” of the owner at the time they were assessed, in addition to being a lien on the unit. Therefore, even following a mortgage foreclosure, the association can, and often should, pursue the individual personally for the amounts owed up to the date the mortgage company became responsible for assessments. This can be done in conciliation court (if the amount is less than $7,500), or in district court for larger amounts.
"Collecting a judgment is next to impossible, so you should not waste your time obtaining one.” – Board member
While some associations are obtaining judgments, they are not always taking the necessary steps to properly and efficiently collect on these judgments. In Minnesota we have several tools for collecting on judgments. The two most common are bank levies and wage garnishments. Armed with a personal check that was previously used to make a payment, an association can levy all the funds (up to the amount of the judgment) in the unit owner’s bank account. An association can often collect a significant portion of a judgment via a bank levy.
If the association does not have bank account information, or the account does not contain sufficient funds or is closed, a wage garnishment can be an effective collection tool. Before an employer can be contacted about a wage garnishment, notification must be sent to the debtor. Many individuals do not want their employer informed of their financial situation and will voluntarily pay the judgment or enter into a payment plan upon receipt of this notice. Should the debtor fail to respond, the garnishment will require the employer to garnish a percentage of the wages and pay that money to the association.
An association that does not have banking or employment information can require a debtor to complete a Financial Disclosure Form that details all of their financial assets and employment information. This form is issued as an Order of the Court. The information provided can be used by the collection attorney to aid in collecting the debt. Failure to complete the form can result in a judge finding the unit owner to be in contempt of court, and issuing an arrest warrant for the individual.
Associations should remain diligent in their collection practice as it is far easier to collect a debt in the early stages of delinquency. Each association should have a collection policy in place that contains clear steps to be followed once an account reaches a certain delinquency amount. While each account should be treated individually, a general process should be established.
1. Minn. Stat. §515B.3-116(c)
2. Minn. Stat. §580.23, Subd. 1 (a) provides for a six month redemption period; Minn. Stat. §580.23, Subd. 2 provides for a twelve month redemption period for older mortgages, or ones that have been significantly paid down. Under Minn. Stat. §580.032, if the property meets the legal standard of "abandoned,” a foreclosing party can have the redemption period judicially reduced to five weeks. A voluntary foreclosure under Minn. Stat. §582.32 Subd. 5(d) provides for a two-month redemption period. Finally under Minn. Stat. §580.07, if a homeowner postpones the date of the foreclosure sale, the redemption period is automatically reduced to five weeks.