I constantly advise clients of the pitfalls surrendering a home subject to  Homeowner’s Association (“HOA”) dues.  HOA’s are tied to property ownership, not possession.  So when a debtor files a Bankruptcy case the debtor is granted a discharge for any amounts owed to the HOA before the bankruptcy.   The upside is limited because the HOA’s will continue on the property until the foreclosure process is completed.  Often debtors will stay in the home and ride out the foreclosure because it is “free rent” since they are no longer paying the mortgage payment.  However, if  the mortgage company fails to move the case forward timely then the debtor is still responsible for the HOA charges after the Bankruptcy filing.  This is the double-edged-sword and could take years.  Saving on the mortgage payments is a trade off but may come at the cost of continuing to pay the HOA’s.  Comparing the two, the trade off is usually favorable for the post-discharged debtor.

If the debtors have already surrendered and vacated the property the debtors will continue to incur those charges until the foreclosure process is completed.  This is a hard pill to swallow.  No one likes paying for something where there is no tangible benefit.  It is like paying for a gym membership and not going to the gym.  Unlike the gym membership which can be cancelled at any time, HOA’s cannot be cancelled voluntarily.  Ownership of the property has to change before the HOA’s are “cancelled” for the debtor and I advise clients to watch for the event which terminates the ownership.  This is known as the Special Master’s deed.  A Special Master will be appointed by the foreclosure Court to sell the property at a foreclosure sale.  The Special Master will record a deed granting the title to the purchaser at the foreclosure sale (most likely the mortgage company).  At that point in time the HOA’s are cut off and the debtor is freed from future HOA’s.

They are ways to mitigate this HOA problem.  For example, if the debtors can finish the foreclosure process before filing the Bankruptcy then the title has already passed and the debtors are no longer responsible for the HOA’s.  The debt to the mortgage company and the HOA’s are still dischargeable even after the foreclosure so this is not a problem going forward.  If the debtor chooses to file before the foreclosure is completed then the debtor has to make a choice.  Will the HOA charges be too expensive when compared to the trade off of skipping the mortgage payments?

Don’t get caught in the HOA pitfall.  Seek qualified legal advice before making your decision about when and how to surrender a property in bankruptcy.