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June 2023

Covenant Enforcement and the Automatic Bankruptcy Stay

Little can be more frustrating to an association than when a non-compliant homeowner files for bankruptcy. The bankruptcy laws are complex, and navigating them can be a challenge even for the most sophisticated managers. One of the broadest protections for homeowners that file bankruptcy is the “automatic stay.” This provision of the bankruptcy code immediately halts all efforts to enforce any claim against the debtor that may affect the homeowner’s property, including collection of overdue assessments and non-compliance fees. What’s more, it hampers associations’ ability even to enforce the governing documents related to upkeep of the property due to the prohibition of acts to “exercise control over property of the [bankruptcy] estate,” which may include the home and property on which it sits. 

Luckily, the Bankruptcy Code creates a method for associations to work through the rules to be able to enforce the covenants. An association can seek relief from the automatic stay by filing a motion with the Court, explaining the violation, how it is damaging the community, and why the Court should allow the association to seek judicial remedies to enforce the restrictions. The Bankruptcy Courts generally look favorably on these motions as they are not seeking to collect money owed from the homeowner but rather are simply trying to compel the owner to keep the property in compliance with the governing documents. In fact, many times, homeowners, the association, and the Trustee (the individual tasked with managing the bankruptcy estate) can work together to agree to the relief from the automatic stay without ever having to enter a Courtroom.

Fortunately, the Bankruptcy Courts handle hundreds of similar motions every year, so they have created a streamlined process. If the association, homeowner, and Trustee come to an agreement, they can submit an order that the Court will generally review and sign promptly. Otherwise, the association can file a motion with the Court and set a hearing within as little time as a few weeks to have the matter heard. This can be very beneficial to an association with a homeowner that has violations that are long overdue for correction. 

Gordon & Rees has experienced bankruptcy attorneys that can help associations seek relief from the automatic stay. Their bankruptcy attorneys can also help file proofs of claim and attempt to ensure that the association receives everything they are entitled to through the course of the bankruptcy.

Bankruptcy, Restructuring & Creditors' Rights

Gregory S. Bean

Bankruptcy, Restructuring & Creditors' Rights