Although rare, there are situations where a Homeowner’s Association (HOA) can and will go bankrupt. Although it’s typically due to other criminal acts (such as embezzlement or fraud), the HOA will nonetheless end up filing for bankruptcy as a way to resolve debts.
So what happens to the homeowners that pay into the association? As more new communities pop up around the country, new buyers typically must to a pre-set HOA agreement, including a host of rules that apply to each resident and household within the community. HOA members are responsible for monthly dues that typically go towards overall community maintenance and ongoing management costs. Mismanaged HOAs (even those with minor financial issues) can lead to lost money and persistent difficulties.
What Type of Bankruptcy Would an HOA File?
In most cases, the HOA would file for a Chapter 11 bankruptcy in an effort to restructure the organization to keep it afloat. The first thing that will happen is that the court will freeze all of the HOA’s assets and appoint a trustee to analyze the association’s financial integrity. The HOA will disclose all of its assets and income sources to the bankruptcy court through this process. This may also be an opportunity for HOA members to look at the assets and financial records if they haven’t already.
How the HOA Can Stay Solvent Through Bankruptcy
The court and trustee will take whichever measures are necessary to keep the HOA solvent. This could mean a significant change in ownership, leadership, or the general day-to-day operations. The trustee will identify the biggest financial liabilities and attempt to restructure those to keep the HOA going. This could mean a cut per modification in previously promised services and likely renegotiating a comprehensive HOA agreement that all members would have to agree to unless the court supersedes the decision.
Action Arkansas Homeowners Can Take
In some cases, members of the HOA may want to sue the association for financial negligence. Still, in reality, 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 activity is suspected, then HOA members 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 as a paying member. Natural State Law is a trusted source throughout Arkansas and is here to help. Call (501) 916-2878 to learn more.