I already gave up the house, why am I being billed by my HOA? As bankruptcy attorneys, we are all hearing this complaint from clients with increasing frequency these days. As counter intuitive as it may seem, we are today often asking mortgage lenders to hurry up and follow through with a foreclosure in a timely manner.  This happens most commonly in a Chapter 7 Bankruptcy in which the debtor has decided to surrender a home.

Of course, stating “surrender” in the Statement of Intentions section of a bankruptcy petition and the mortgage lender actually taking title to the property are two entirely different things. And, unfortunately, the bankruptcy debtor who surrenders his or her property in the bankruptcy case, remains the legal title owner of the property until the bank actually forecloses on the property.

This fact can cause the bankruptcy debtor the ongoing nuisance of various recurring bills associated with homeownership. The biggest source of such ongoing bills are Homeowners Association dues, and to a lesser extent, municipal water and garbage fees. Clients giving up a home in a bankruptcy must be carefully advised that such recurring fees accumulate post-petition, and precisely because they recur post-petition, they constitute new debt. And as we all know new, post-petition debt is not discharged in bankruptcy.

Three or even just two years ago, the lenders would typically foreclose right after the closing of a Chapter 7 case. More often than not, they would seek relief from the Automatic Stay and sometimes foreclose before the Chapter 7 case was closed. But today, the banks simply don’t want another property on their books.

The problem is that while the banks take their sweet time to foreclose on a surrendered property, HOA dues and city water or garbage bills continue to accumulate. In California, the record owner will remain liable for these personally until these debts are paid. Unlike property taxes, for which liability runs with the land and is not personal to the homeowner, an HOA may sue the owner for as long as the relevant statue of limitation allows, and they will usually be awarded attorneys’ fees to boot. Sadly, there is nothing the debtor or the debtor’s bankruptcy attorney can do to compel the mortgage lender to take title to the property so as to cut off this ongoing source of liability.

Where does this all leave the bankruptcy debtor who must surrender his or her property? In a Catch-22 to be sure. The lender may not foreclose and take title for months, if not longer, after a Chapter 7 bankruptcy is filed. Homeowners Association Dues, however,  continue to accrue on a monthly basis. Frequently, the debtor has moved along and cannot easily rent the property given the impending foreclosure.

This problem would not arise if mortgage lenders would foreclose in a timely manner in the context of a bankruptcy debtor who surrenders a home. We as bankruptcy attorneys can literally beg that lender to foreclose already–or, better yet, accept a deed-in-lieu of foreclosure, but if they do not want the property on their books, the lender will simply not accept a deed-in-lieu.

What advice to give this client?  The options are few. If the debtor can hang on until the property actually forecloses prior to filing bankruptcy, this would eliminate the problem. But such a delay is not an option for most bankruptcy debtors who may also be facing law suits, wage garnishments, vehicle repossessions and other urgent problems. If putting off the filing is not an option, the bankruptcy client should probably continue to live in the property and to pay his or her HOA dues and municipal services, or if the property is a second home, for example, attempt to rent the property to cover these ongoing costs, while disclosing the situation to any short term renter, of course.

Bankruptcy law never contemplated this situation. The last time that such a significant number of homeowners were this far “underwater” on their home mortgages was during the Great Depression. Similarly states’ statutes governing homeowners’ associations have always presumed that sufficient equity would exist in the average home to cover HOA liens through foreclosure by the HOA. Today, with most surrendered homes encumbered by a first mortgage, a Home Equity Line of Credit, and perhaps an HOA lien third in line, there is most often not sufficient equity to pay off even the first loan. A remedy under the Bankruptcy Code to compel mortgage lenders to take title to surrendered real property would be ideal, but we can safely say the likelihood of such a legislative solution is remote indeed.

In the meantime, before we counsel Chapter 7 clients about surrendering a home in bankruptcy, it is imperative that we investigate whether the property is subject to an HOA and carefully explain to our clients that HOA dues, water, garbage, and potentially other recurring bills may continue to burden the client long after the bankruptcy discharge.