Changes in Chapter 13 Bankruptcy Law Treatment of Condominium Association Liens
Over the past year, New Jersey bankruptcy law concerning condominium association liens and their treatment under a Chapter 13 plans of reorganization has dramatically changed. Prior to February 2016, debtors could propose paying six months of condo association unpaid assessments, and have the remainder of the condo association’s lien be removed if there was no equity in the debtor’s principal residence. Consequently, the association’s lien would be treated as unsecured and likely be paid pennies on the dollar. For example, pretend that a debtor’s condo association dues is $100.00 per month, and the debtor failed to make payments for one year. Further, let’s assume that the condo association has properly placed a lien on the property for $1,200.00, equal to one year of missed payment. Under a Chapter 13 plan of reorganization, if the debtor’s principal residence has no equity, then the debtor would limit the amount paid to the condo association to six months, ie. $600.00, and have the remainder of the debt be treated as unsecured. Furthermore, the debtor would strip off the lien from the principal residence.
In February 2016, the New Jersey District Court reversed a U.S. Bankruptcy Court, District Court of New Jersey decision, and ruled that the New Jersey Condominium Act provided a limited super-priority for condominium association liens for unpaid assessments, which elevated a portion of such lien above senior claims. In re Rones, 551 B.R. 162 (D.N.J. 2016). Consequently, none of the lien could be stripped off under the Bankruptcy Code’s anti-modification provision. As a result, the debtor was required to pay the full amount of the lien under a plan of reorganization.
Ordinarily, a debtor’s bankruptcy plan may modify the unsecured portion of a lien down to the amount of the collateral when the collateral is worth less than the lien. However, debtors may not strip off a lien if it is “secured only by a security interest in real property that is the debtor’s principal residence.” 11. U.S.C. 1322(b)(2). This provision, known as the “anti-modification clause”, has been interpreted by the U.S. Supreme Court to prohibit modification of claims in a bankruptcy plan where those claims are either secured or partially secured by a debtor’s principal residence. Thus, if even one dollar of a creditor’s claim is secured by a security interest in a debtor’s principal residence, then the entire claim, both secured and unsecured portions, cannot be modified under Section 1322. This is known as the “one dollar” rule.
New Jersey’s Condominium Act, originally enacted in 1969, was amended in 1995 to provide a limited super-priority to liens record by condominium associations for unpaid assessments. N.J.S.A. 46:8B-1-38. The Condominium Act provides, in relevant part:
- The association shall have a lien on each unit for any unpaid assessment duly made by the association for a share of common expenses or otherwise, including any other moneys duly owed the association, upon proper notice to the appropriate unit owner, together with interest thereon and, if authorized by the master deed or bylaws, late fees, fines and reasonable attorney's fees; provided however that an association shall not record a lien in which the unpaid assessment consists solely of late fees. ... Except as set forth in subsection b. of this section, all such liens shall be subordinate to any lien for past due and unpaid property taxes, the lien of any mortgage to which the unit is subject and to any other lien recorded prior to the time of recording of the claim of lien.
- A lien recorded pursuant to subsection a. of this section shall have a limited priority over prior recorded mortgages and other liens, except for municipal liens or liens for federal taxes, to the extent provided in this subsection. This priority shall be limited as follows:
(1) To a lien which is the result of customary condominium assessments as defined herein, the amount of which shall not exceed the aggregate customary condominium assessment against the unit owner for the six-month period prior to the recording of the lien.
In combining the New Jersey Condominium Association Act and the Anti-Modification provision of the Bankruptcy Code, the condo association lien is elevated over the mortgage on the property (limited to six months). Therefore, under the “one dollar” rule, because a portion of the lien was secured by a security interest in the debtor’s principal residence, no portion of the condo association lien could be stripped off.
If you have any questions concerning your condo association dues and you are thinking about filing for bankruptcy, please contact us to discuss you potential options.
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