Bankruptcy May Not Kill Collections

Bankruptcy May Not Kill Collections
September 2, 2014 | By: Clint Goodman

Lawyers love their legal maxims. One of my personal favorites is incendium aere alieno non exuit debitorem. It means a fire does not release a debtor from his debt.

Many people think that a homeowners association’s assessments are completely wiped out when one of its homeowners files for bankruptcy. That is not true. Bankruptcy may not kill collections!

The bankruptcy laws and attorney articles about the subject can be difficult to understand. The general rule is that “liens pass through bankruptcy unaffected.” Dewsnup v. Timm, 502 U.S. 410 (1992). As recent as 2005, this general rule was discussed. The 9th circuit court wrote that “liens ordinarily pass through bankruptcy unaffected, regardless whether the creditor holding that lien ignores the bankruptcy case, or files an unsecured claim when it meant to file a secured claim, or files an untimely claim after the bar date has passed.” In re Brawders, 325 B.R. 405, 411 (9th Cir. BAP 2005) (emphasis added). In Brawders, the Court held that the lienholder’s failure to object to a Chapter 13 plan proposing to pay the lienholder $9,350.00 did not affect the value of the actual lien. Rather, the lienholder (1) was limited to $9,350 from the Chapter 13 bankruptcy case, (2) could not collect the claim personally against the discharged debtors, but (3) the amount actually due and the amount of the lien were unchanged. What this means for an association is that it may still have its foreclosure rights should the debtor refuse to pay off the amounts incurred prior to filing for bankruptcy. Incendium aere alieno non exuit debitorem. Or, should we say, a bankruptcy does not release a debtor from his debt.

Caveat-the association’s lien may be extinguished by a superior lien holder. The above analysis does not apply in that situation.