Sunday, September 4, 2011


The 2005 revision of the bankruptcy code was drafted with a provision that states the owner of the property is responsible to post-petition homeowner association fees. So, where's the problem. The problem rest with Chapter 7 debtors that wish to surrender their real property through the course of the bankruptcy; the mortgagee, or holder of the mortgage, does not have to take the property. That means, if the mortgagee refuses to take the property, the debtor could incur significant accruing debts after the filing of the bankruptcy. If the bank chooses to delay the foreclosure, and refuses to take ownership of the property, the debtor is responsible for the accruing homeowner association fees, and in Florida, those fees follow the owner, personally, and not the property.

Judge George C. Paine, II, a bankruptcy judge in Nashville, decided to draft a solution to this problem.. This is not an easy task, as the court is limited in the scope of what it can do. For example, the courts have consistently held they can not force the mortgagee to take the property. Judge Paine decided to use the Court's equitable power under section 363 to order the property sold in a case involving Bank of America. What a simple, and logical solution to a daunting problem. Normally, the Trustee is the one that is responsible for handling a sale of assets for the bankruptcy estate. This almost always occurs when there is equity in the asset being sold sufficient to distribute money to unsecured creditors after deducting money to pay the secured creditor and administrative expenses. This is a clear departure from tradition. It is not known if the Court's order would withstand the scrutiny of an appeal.

This appears to be a win/win for all parties. The debtor can divorce himself of the accruing homeowner association fees, and the mortgagee may be able to circumvent the need for a foreclosure sale. Hopefully we will see other courts adopt some version of Judge Paine's Order.

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