HOA dues and foreclosure

HOA Liability and Foreclosure

One of the many things we advise clients about when they come in to see us is whether or not they should walk away from their home.  Often we get client’s who are underwater with negative equity or their Adjustable Rate Mortgage is going to increase drastically and the monthly payment will no longer be affordable, with or without the bankruptcy.

In the end, sometimes it is best to walk away from the home and start over again.  Since bankruptcy gets you out of all liability on a mortgage, surrendering can be a great idea.  Enter the homeowners association.  As it turns out, in Washington State, the homeowner continues to be liable for homeowners dues post bankruptcy filing so long as they are on title to the home.  With the current backlog of foreclosures, this creates a problem.

Example: Let’s say that the debtor decides to let the home go.  We file the bankruptcy on Novemeber 1, 2008.  We indicate in the petition that the debtor will surrender the home.  The case goes smoothly and the debtor gets their discharge around February 1, 2008.  Just before the bankruptcy, the debtor moves out of the home.  This makes sense because after all, they are surrendering the home.

How Long to Stay in the Home

Our good moral values tell us that if we are giving something up, we shouldn’t use it anymore!  It makes even more sense, because the debtor believes that the bankruptcy will preclude them from finding a new place to rent post discharge.  Fast forward to October 2009.  The debtor has long since walked away from the home, they have started a new life, and they are happier after the bankruptcy.  Suddenly, they are served with a summons and complaint for past due homeowners dues!

The bank has still not foreclosed on the property and technically, the debtor still owns the house!In Washington State, this type of lawsuit is perfectly legitimate because the debtor’s name is still on the title.  That means that they are liable for the homeowners dues that accrued post petition.  A nasty little side effect of the housing crisis.  Mortgage companies are backlogged on foreclosures.  If they foreclose on the home, they introduce the home into the market.  By flooding the market with a surplus of homes, home values are driven down even further, thus exaggerating the loss already suffered by the bank and the homeowner.  So the bank waits.  And the debtor remains liable.

Is Walking Away the Right Move?

What is the lesson in this?  In Washington State, it may not be the smartest thing to walk away.  If you stay in the home and wait for the actual foreclosure proceeding, you may be able to stay in your home for a period of anywhere from a few months to a couple of years.  If you don’t pay the mortgage this is money you are putting in your pocket and saving.  If all you have to pay is the homeowners dues, then the ‘rent’ on your home is pretty cheap. Once the foreclosure notice is posted on the door, you know that you have 90 days to move out.  Plenty of time to get your house in order and find a new place to live.  The bottom line is this.  So long as your name remains on title in Washington State, you remain liable.  Bankruptcy will get rid of the obligation to pay the mortgage, but it won’t remove your name from the title on the home.  Something to think about.