Condominiums and planned communities in North Carolina are created by recording a Declaration in the county or counties where the condominium or planned community is located. A recorded Declaration imposes certain obligations on the part of owners, typically including the duty to pay dues and assessments ("Assessments") to a property owners association ("POA") for the maintenance and upkeep of common areas. In addition to the owner's personal liability for Assessments, the failure to pay Assessments may give rise to a lien in favor of the POA against the owner's unit or lot for the amounts due, and these liens may be the basis for a foreclosure action similar to the foreclosure of a deed of trust. The duty to pay the Assessments generally continues for so long as the owner continues to own the unit or lot.
But what happens if the unit or lot owner files for bankruptcy? Does the owner have to continue paying the Assessments that come due after the bankruptcy filing? What if the property is vacant, or the owner wants to surrender or abandon the property as part of the bankruptcy proceeding? Does it make a difference whether the owner files Chapter 7 (liquidation) bankruptcy or Chapter 13 (workout) bankruptcy?
Bankruptcy Proceedings and Assessments
Generally, obtaining a discharge in bankruptcy will only eliminate the debtor's personal liability for pre-petition debts (i.e. debts that existed on the date the bankruptcy petition was filed). If a debtor incurs new debt after filing a bankruptcy petition, the new debt is generally not affected by the bankruptcy discharge. In order for there to be a pre-petition debt, the creditor must have a right to payment on the bankruptcy filing date.
In a Chapter 7 bankruptcy, an independent Trustee is appointed to oversee the liquidation of the debtor's non-exempt assets. After the Trustee completes the liquidation of assets, the debtor receives a discharge of certain debts while certain other debts are specifically excepted from discharge. Courts are in agreement that a Chapter 7 bankruptcy discharge does not discharge the debtor's personal liability for post-petition Assessments owed to a POA. In other words, the debtor remains personally liable for Assessments arising after the Chapter 7 bankruptcy petition date and continuing for so long as the debtor owns the property.
In a Chapter 13 bankruptcy, a debtor with regular income commits to making regular payments to the debtor's creditors over the course of a three- to five-year plan. In exchange, upon successful completion of the plan, the debtor receives a broader discharge than a Chapter 7 debtor.
Bankruptcy courts across the country have split on the issue of the Chapter 13 dischargeability of post-petition Assessments. For example, the United States Bankruptcy Court for the District of Utah concluded in 2011 that post-petition Assessments are "claims" that can be provided for in a Chapter 13 plan. As a result, and based on the fact that the debtors vacated the property and "surrendered" all rights in the property to their secured creditor, the Utah court concluded that the debtors' personal liability for post-petition Assessments was dischargeable in the Chapter 13 bankruptcy case. The United States Bankruptcy Court for the District of Maryland held similarly in 2014.
On the other hand, the United States District Court for the Eastern District of Michigan held in 2011 that post-petition Assessments are post-petition claims that are not discharged in a Chapter 13 bankruptcy, even when the Chapter 13 debtor surrenders all rights in the property. The United States District Court for the District of Maryland reached this same conclusion in 2012.
While no bankruptcy court in North Carolina has directly addressed this question, the United States Court of Appeals for the Fourth Circuit (which has jurisdiction over federal cases arising in North Carolina, including bankruptcy cases) held in 1994 that post-petition Assessments are post-petition debts that arise from the recorded Declaration.
Under well-settled North Carolina law, the obligation to pay Assessments (whether pre- or post-petition) is a covenant running with the land that continues as long as the debtor continues to own the property. In other words, the personal obligation to pay post-petition Assessments derives not from some pre-petition contractual obligation to continue paying for a period of time but instead from continued ownership. Because a POA has no pre-petition right to payment for post-petition Assessments, arguably there is no "claim" that can be asserted by the POA for those Assessments. If there is no recognizable pre-petition claim for post-petition Assessments, then, as of the bankruptcy petition date, there is no liability on the debtor's part for such Assessments. Consequently, there is no "debt" for post-petition Assessments that Chapter 13 debtors can provide for in their Chapter 13 plan. After all, a plan cannot provide for treatment of a "claim" that does not exist. Under relevant sections of the Bankruptcy Code, the Chapter 13 discharge only includes "debts" provided for in the plan.
Under this analysis, the logical conclusion is that a debtor's personal liability for post-petition Assessments is not discharged in a Chapter 13 bankruptcy proceeding. Moreover, this analysis makes it irrelevant whether the debtor has "surrendered" the debtor's rights in the property, as the mere act of surrender does not divest the debtor of legal ownership or the attendant obligations arising from ownership; therefore, post-petition Assessments are owed to the POA.
While a POA has no legal right to pursue a claim ultimately determined to be discharged in bankruptcy, the Fourth Circuit's holding in Rosenfeld supports the position that post-petition Assessments are not dischargeable in a Chapter 13 bankruptcy proceeding. However, POAs should consult closely with their attorneys and undertake a careful cost-benefit analysis before making a decision to pursue collection of Assessments against any owner who has received a bankruptcy discharge.
 See In re Colon, 465 B.R. 657 (Bankr. Utah 2011).
 See In re Khan, 504 B.R. 409 (Bankr. Md. 2014).
 See In re Spencer, 457 B.R. 601 (E.D. Mich. 2011).
 See Heffner v. Elmore, Throop & Young, P.C., 2012 WL 2138097 (D. Md. 2012)
 See In re Rosenfeld, 23 F.3d 833 (4th Cir. 1994).
 See In re Schechter, 2012 WL 3555414 (Bankr. E.D. Va. 2012).
© 2020 Ward and Smith, P.A.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.