Although rare, there are situations where a Homeowners’ Association (HOA) can and will go bankrupt. Although such situations are typically due to criminal acts (such as embezzlement or fraud), a critical number of member homes going into foreclosure could also cause the HOA to file for bankruptcy as a way to resolve its debts.
What happens to the homeowners that pay into the association? As more new communities pop up around the country, home buyers are typically bound into some sort of HOA agreement. A mismanaged HOA can lead to a lot of lost money depending on the size of the community.
What Type of Bankruptcy an HOA Will File
In most cases, an HOA would file for a Chapter 11 bankruptcy that would restructure the organization to keep it afloat. As part of the filing process, the HOA will disclose all of its assets, debts, income, and expenses to the bankruptcy court. Any collection efforts by creditors will be stayed by the automatic stay upon the filing of the case.
How the HOA Can Stay Solvent
The HOA must consider its obligations, income, and expenses when proposing a plan of reorganization that will allow it to become solvent. The leadership or day-to-day operations of the HOA may change as part of this process; services provided by the HOA may be reduced to allow it to divert its income towards paying its debts. The members of the HOA may need to agree to a renegotiation of the HOA agreement.
Action Homeowners Can Take
In some cases, members of the HOA may want to sue the association due to mismanagement. However, it’s probably easier to work with the bankruptcy court to devise a long-term plan to move the association forward in a way that works for the members. If criminal action is suspected, then HOA members do have the right to lobby for additional charges or measures taken against those at fault.
If you suspect mismanagement of your HOA, it may be wise to consult an experienced bankruptcy law firm to understand what options may be open to you. Natural State Law is a trusted source throughout Arkansas and is here to help. Call (501) 916-2878 to learn more.