Show Me the Money Collections, Foreclosure & Evictions

Show Me the Money

The first of the month rolls around and it’s time to pay the bills that keep your building operational. Repairs might need to be made, staff salaries paid, maintenance done to keep all the common elements running, and supplies reordered. The consistent influx of funds from residents' monthly fees is what makes all of this possible, and keeps a building or HOA functional and solvent from month to month. But sometimes—not often, but sometimes—residents don't hold up their end of the condo-living contract, and fall into arrears. 

Reasons for Nonpayment

“According to most owners, it's just that they simply don't have the money," says Anne Ward, an attorney with the law firm of  Ehrlich, Petriello, Gudin & Plaza in Newark of the most common explanations given for arrears. "And then sometimes you get people who just don't pay because they think they're entitled to withhold payment for various reasons—some of which are just completely irrational and irresponsible. Sometimes they allege claims against the association that they're not providing the services that should be provided, or they've requested documents that they're entitled to see and the board has refused to allow them access. Or there may be no articulate reason at all." 

“My theory has always been that most Americans take on obligations with a full understanding and expectation that they're going to comply with them," says David J. Byrne, a partner with Ocean Township-based law firm of  Ansell, Grimm & Aaron, PC’s Community Association Practice Group. "They get married, they buy a house, sign a mortgage. I think people expect to comply with the promises they make, but then something happens and intervenes, and things change. So I think most people would rather pay their assessments but for whatever reason, they don't.” 

The Short End of the Stick

Regardless of the reason for nonpayment, financial and legal pros advise boards to move swiftly—and fairly, of course—when it comes to recouping lost revenue from an owner in arrears. Steven Mlenak, an associate with the Community Association Practice Group at the law firm of Greenbaum, Rowe, Smith & Davis LLP in Woodbridge, notes that an association is usually either the first group to stop getting paid, or the last.

“Usually, the mortgage and utilities are always going be paid, because there's a general understanding that if you don't pay your mortgage, you're going be foreclosed on," Mlenak says. "If you don't pay your utilities, the lights are going off. With the association maintenance, there's not always that same understanding of consequences—so that's why we're usually the first to stop getting paid."

“On the flip side," he continues, "sometimes we're the last to stop getting paid, because the mortgage is usually much more expensive and it's easier to continue paying other bills with the money you save from not paying your mortgage. So it runs the gamut from people owning a house that they can't afford—which is especially true for people who got into adjustable rate mortgages and things like that at the height of the housing bubble—to people losing their jobs or getting divorced. But certainly, we've seen that there are a lot of delinquencies running throughout the New Jersey area in community and homeowner's associations than before.”

Pay Up

There may be innumerable reasons people use to justify not paying their condo fees, "But under the law in New Jersey, they absolutely have to pay the fees," says Ward. "There's an appellate division case on this point. They can't withhold those fees for any reason, even if they assert counterclaims that are ultimately successful.”

When a unit owner hasn’t paid, the pros generally agree that moving swiftly—but fairly, of course—is the best option for a board, because it positions the building or HOA for a better chance of recouping the funds needed to keep the association operational.

“My recommendation to my boards is always to take the first step," says Mlenak. "Before turning a resident in arrears over to legal, always make sure you take at least one stab at getting them to pay, to save on legal expenses. Send them a reminder letter, then a collection letter. But as soon as it's gone on for a couple of months and that amount starts to accrue, not only will it be harder to collect, but you'll have less time to do it. For example, I have one client that tends to wait a very long time before turning  arrears over to me. By the time it is turned over to me, it's way too late—the lender is close to doing a sheriff's sale of the property, and there's relatively few assets or equity in the home to collect upon. So it's important to get on it early to be able to have any chance of success on collecting on some of the accounts."

Ward agrees, adding, “I always advise associations to send demand letters immediately, because under the Fair Debt Collection Practices Act, even after you send a demand letter for payment you still have to wait 30 days before you file a complaint against the resident or file a lien on the unit.”

Working with Residents

This urgency doesn’t mean that a board shouldn’t try and work with residents to avoid unnecessary legal fees and acrimony, however. Many boards are more than willing to give residents the option of catching up on their delinquent payments—with certain caveats.

For example, Byrne notes that not all debts are created equal, and that you’re more likely to actually get the dues owed from certain owners. "It depends on the situation," he says. "Since 2009, I think so many associations have gotten into trouble by continuing to use a standard, clerical-driven collection process, which is like a formula; 'Person owes x-dollars, then this happens. Person owes x-plus-30 dollars, this happens. Person is delinquent for 90 days, this happens.' That doesn't work anymore. Every individual delinquency should be analyzed and assessed on an individual basis, and then decisions made on an individual basis. Every $1,000 debt is not created equal. One might be more collectible than the other. Further, a community that's not in any particular trouble with delinquencies may not need to be all that aggressive with the odd one that crops up. In New Jersey, maybe in some instances it's better just to lien the unit and see what happens. Every dollar you spend on lawyers creates a negative cash position. So not only are the dollars not coming in from the debtor, but they're going out to lawyers. Which is important to do in some instances, but in some instances it's not. You really need to decide on a case-by-case basis."

“When I send out collection letters, I say, 'Contact us to talk about paying this off or to discuss terms of a payment plan,'" says Mlenak. "Most boards that I've worked with are willing to do that, because they know as long as the money's coming in, it stops the attorney's fees from continuing to churn, and it's usually a better solution than not entering into [a payment plan]. Of course there are exceptions—individuals who have been on payment plan after payment plan after payment plan and have breached all of them within months. At that point, the board is not interested in delaying the process anymore. But that's why it's a very individualized assessment of whether or not a board should enter into such an agreement."

Going to Court

When payment plans fail and the unit owners cannot or will not pay the money that they owe, says Byrne, “There's a variety of different things you can do. If you feel the owner actually has some assets, then you could sue them to try and get a money judgment, and then execute on those assets. If a person has no assets, or you believe they have no assets, than a judgment might not have all that much value. If the unit is empty, a smart board will try to use that unit for rental purposes.”

Ward adds that, “I would recommend filing a complaint against an owner in Special Civil Court of the Superior Court. Special Civil Court has a jurisdictional limit of $15,000. Normally, the size of [arrears] is less than $15,000 because hopefully the association hasn't let the debt fly to such a huge amount. If it's over that amount, you have to go to the Superior Court. There are a few advantages of the Special Civil Court as opposed to the Superior Court. One, the Special Civil Court will actually serve the summons and complaint against an owner via mail, as opposed to the lower division Superior Court where the association would have to send that out to a process server and incur that fee. Special Civil Court is just a shorter process. It's easier to get a judgment against an owner who defaults...once you got a judgment, you can proceed with collection.”

Sometimes however, even that doesn't work—and then you may be in for a long foreclosure procedure. Ward explains: “You file a lien, and then you foreclose on the lien. You file a foreclosure complaint, and then if the owner defaults you get a judgment of foreclosure. It's a lengthy process though, and eventually, hopefully you can get a foreclosure judgment, sell the unit, and get the owed money back.”

Mlenak adds that “To start the foreclosure, you have to send the individual what's called a Notice of Intent to Foreclose that gives them time to pay the debt before the foreclosure starts. If that debt is not paid, then the association can file the complaint. And that's just like any other litigation; it gets filed in the chancery court in the county where the property is situated. The debtor will have so many days to answer and defend against the foreclosure, but typically, the only defense would be if there's an error in the association's calculations, or payments that weren't applied. But assuming everything was correct, there really is no defense such as, ‘I lost my job’ or ‘My mother got sick.' Then the foreclosure completes."

Mlenak continues, “Once we have final judgment in the foreclosure action, then we schedule the sale with the sheriff. Because every county is different, that could be anywhere from one to five months from the final judgment date. Counties with very few foreclosures will be very quick, whereas others—like Hudson County, for example—I know is four months out in scheduling at the moment. The public will be notified of the impending sale in the newspaper and online. Because the property is under water or has a large mortgage, typically there won't be a bid placed on the property from a third party. In that situation, the association as the plaintiff in the foreclosure becomes the owner of the property subject to the mortgage. After that, if the unit owner does not voluntarily leave, the association can have the unit owner ejected from the property by the sheriff.”

It's reasonable to say that nobody wants to fall into arrears—nor does a board want to launch legal proceedings against a neighbor, even if they have good reason to do so. But when it comes to upholding a board's fiduciary duty, sometimes these tough choices must be made, and made timely in order to defend the best interests of the building or association as a whole. By knowing the steps of the process and having competent, experienced legal counsel on your side, your condo or co-op can make fair, legally sound decisions about how to handle it when it does happen.  

John Zurz is a staff writer and reporter for The New Jersey Cooperator. 

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