Jun 23, 2016

Collecting delinquent Assessments from units and owners

Boards and managers alike often have questions on how best to collect unpaid Assessments from Unit Owners. There are some finer details and advanced techniques we employ, but if your Association is considering starting the process there are some key issues you should know before getting started with the collection process.

Illinois law is unique in the rights it affords Associations. Condominium, Common Interest Community Association Act (CICAA) and many National Fire Prevention and Control Administration (NFPCA) Associations, have the right to seek unpaid Assessments from units and owners at the same time. Assessments are an absolute obligation due from every unit and its owner and cannot be reduced or waived in any form. Assessments continue as an obligation due from the unit even if ownership transfers. Associations can file suit to evict owners from their units until the balance is paid and obtain a personal judgment against the owners (if served) for the balance due. Associations can also file liens against the units, foreclose those liens, and sell the unit to recover the balance due. Only a qualified attorney should handle this process.

General collection process: starting with a proper demand letter

Generally, the collection process starts with an owner failing to pay their Assessments in full when due. Once the due date passes and the Assessments become late per the Governing Documents, Associations can refer the matter to their Assessment collection attorney. The attorney must start the process with a formal notice to the owner and can advise the Association on the best methods for collecting Assessments from the owner. After the notice is sent and a specific time elapses, the attorney will advise the Association to file a lien and/or file a lawsuit to collect. 

The demand letter is a specific type of legal demand that we prepare for you and bill back against the interest of the Unit Owner who is in default. The demand starts with us verifying who owns the property according to the last deed on title, and checking for any pending lawsuits that might impair our ability to collect your unpaid Assessments such as foreclosure lawsuits or bankruptcies. We then review your ledger and issue a formal demand notice that the owner must pay within a 30-day period. The demand also includes the legal fees and costs that we expend on your behalf that must also be paid to stop further Assessment collection proceedings. If the demand goes unanswered or unchallenged successfully, we proceed to preparing and filing a lawsuit.

Often owners will contact us in response to the demand and ask for a payment plan. Often, payment plans can be useful tools to getting an owner back on track. 

Forcible entry and detainer collection lawsuits

If the demand remains unpaid, we proceed to the next usual step which is to file a lawsuit to collect the unpaid Assessments. The most common type of collection lawsuit is called “forcible entry and detainer,” which is an old term for an eviction lawsuit. We prepare this for your review and once approved, we file it in the nearest circuit court to the property or the court closest to the debtor if they reside offsite. The lawsuit is then filed and served on the owner and unknown occupants at the property. If the owner is served personally a personal judgment can be sought against them. If the owner is incapable of being served the Association can still get a judgment against the property. The lawsuit requires a trial in court where the judge finds that Assessments are unpaid and determines the balance due. The court also enters an award of attorney’s fees and costs. The judgment entitles the Association to evict the owner and/or occupants of the unit until the balance is paid. The judgment also entitles the Association to place a tenant in the unit to rent it out until the balance is paid if the Association wishes to do so. Further, the judgment allows the Association to assign and take any rent that would be paid by an owner’s tenant until the balance is paid. 

As discussed in another article in this issue, Illinois courts have underscored the applicable statute’s command that an owner cannot be restored to possession of their unit until all of the post judgment fees and costs attributable to the unit are paid, and the owner’s Assessment balance is current. 

Assessment liens

Associations may also file liens against the property to recover unpaid Assessments. Liens are legal instruments filed with the county recorder that appear on title to a unit and provide notice to all that there is a balance due from the unit. Liens must be paid before a property can transfer ownership and remain due from the property even if the ownership transfers without resolving the lien. Often, owners will pay the lien when they attempt to sell the unit. Some Associations also foreclose liens filed against units. Much like a mortgage foreclosure, the lien is foreclosed and the property is sold at a judicial sale for the value of the lien. 

Threats to Assessment collections

Assessments are subject to certain threats that can impair their collection. Mortgagees, or banks that hold a mortgage for a property, can foreclose on delinquent mortgages. Illinois law makes mortgages a first priority interest on a property. This means that mortgage foreclosure can wipe out an Assessment lien. However, Illinois law does protect Associations in this process.  Condominium Associations can recover up to six months of unpaid Assessments from a post-foreclosure purchaser (other than the bank) plus costs and legal fees associated with a prior action to collect against the foreclosed owner, provided the Condominium Association attempted to collect from that owner before foreclosure concludes. In the event that a bank buys back a condominium unit at foreclosure sale and then fails to pay Assessments after sale, Condominium Associations may recover the prior owner’s delinquency from the bank. CICAA properties also may recover up to six months of unpaid Assessments plus costs from the post-foreclosure, non-bank purchaser if they sought to collect before foreclosure concludes. NFPCA Associations are often not so fortunate, but may have additional remedies in their Governing Documents.

Bankruptcies also impair or reduce an Association’s ability to collect Assessments, in certain situations. Chapter 7 bankruptcy actions discharge a debtor’s balance due to most all creditors, including Associations, prior to the date of filing of a bankruptcy petition for discharge. Post-petition amounts remain due and owing from the unit and the owner, but special collection steps must be followed before an Association can collect while bankruptcy is pending. Chapter 13 bankruptcies provide for the debtor paying all or a major portion of their pre-petition debt through the course of the bankruptcy action, usually over five years. Post-petition amounts remain due and collectable but special steps must be followed while bankruptcy is pending. The Association’s collection attorney should be experienced in these areas and can advise an Association how to proceed when bankruptcy is an issue.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: James R. Stevens, Principal