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Clear collection policies can help community associations cover expenses and maintain reserves.
By Pamela Babcock
©2023 Community Associations Institute
ASSESSMENTS ARE PART of living in a community association. They help maintain roofs, sidewalks, and landscaping and pay for popular amenities such as a community pool and programming. Another reality? Chasing delinquent owners for overdue payments.
Owners who don't pay on time are cheating their neighbors and the community they live in. The financial position of a community has a direct effect on every member, particularly if it forces amenities to be curtailed. Late payments can cause cash flow problems for communities with a tight budget and, over time, can lead to diminished property values.
Community association boards need to have a collections policy that outlines what happens when an owner becomes delinquent. These policies should comply with applicable laws and governing documents and have reasonable timeframes with flexibility, says Richard A. Sussmann, CMCA, AMS, PCAM, community manager with Property Management People Inc., in Kearneysville, W.Va.
“Each case is unique, and boards of directors should be flexible when it comes to payment plans to encourage and work with delinquent owners whenever possible," Sussmann says. A 100% collection rate is not a realistic expectation, he says, but it pays to do the best you can under the circumstances, and never assume anything.
“You never know what is going on in the lives of delinquent owners," Sussmann says. “The most successful collection efforts involve creativity and patience."
Late payments can cause cash flow problems for communities with a tight budget and, over time, can lead to diminished property values.
WHY IT HAPPENS
Most associations collect assessments monthly, although some collect them quarterly and others in an annual lump sum.
Owners become delinquent for many reasons. They might have fallen on hard times after losing their jobs, be facing significant medical bills, or have financial difficulties for other reasons. The unit may be a rental and the owner hasn't provided an off-site mailing address, so they may not even be aware of the delinquency.
Some unwittingly become delinquent after a new management company takes over because they haven't transferred their automatic payments to the new company.
“A lot of people don't check their auto pay to make sure that it's still coming out, so they think they're good," says Chantelle Neumann, lead attorney with Hirzel Law's collections department in Farmington, Mich.
Delinquencies also can arise when an owner passes away or can't pay the mortgage and abandons the property, sometimes without notice. And some repeat offenders simply aren't diligent about paying bills.
“I've heard of people saying they don't care about late charges; they're only going to pay their assessments three months at a time and, instead of paying ahead, they pay behind," says Neumann, who recently presented a CAI webinar on the topic. Other offenders include angry owners who balk at paying assessments because they disagree with bylaw violations.
NUTS AND BOLTS
Community managers typically send delinquency notices, so they're usually the first line of communication with an owner who has fallen behind. The manager's role in collections should be laid out in the management agreement.
A collections policy helps ensure that all owners are treated equally. Failing to treat everyone equally may lead to claims of discrimination or selective enforcement, according to Matthew Markley, an associate attorney in the collections department at Hirzel Law.
Collection policies typically have timelines for how long an owner has to make a payment before the issue is turned over to a collections attorney. It might outline payment plans if the association is willing to offer one. And it should explain legal actions if there's no response.
Such a policy should not conflict with current governing documents. “You can't write something in that isn't allowed or isn't written in existing documents unless you amend your governing documents," Markley says.
A general framework might be:
❚ If an owner is 15 days delinquent, a first-notice letter will be sent by the board or community manager.
❚ If there's no response within 45 days, a second delinquency letter will be sent. This is a good time to double check for an up-to-date email or address for the owner.
❚ If 60 days elapse and there's no response, the policy may note that the matter will be turned over to an association attorney, who will send a demand letter.
The next step may be recording a lien or filing a lawsuit against the owner—or as a last resort, foreclosing on the property.
“Because of the speed and seriousness of the process, a lot of accounts get resolved at the 60-days stage," Neumann says, adding that many owners who are in denial or ignoring requests often will pay when threatened.
CAI believes foreclosure should only be used as a last resort—applied after all other measures have failed.
Collection rules vary by state, and can get tricky, particularly for smaller, self-managed communities.
STEADY GOING
Even with historic increases in inflation and general economic uncertainty, Sussman says his company has not seen a recent jump in foreclosures or short sales among the portfolio of properties it manages, unlike during the 2008 financial crisis.
“The recent surge in housing values meant that some owners had sufficient equity to pay off creditors by refinancing or selling," Sussmann says. In addition, some owners can take advantage of governmental assistance programs such as the West Virginia Homeowners Rescue Program to bring their accounts up to date.
No matter the economic climate, flexibility is particularly important because some owners may be considering bankruptcy, which would add even more fees. An owner who declares Chapter 7 bankruptcy “could get the debt wiped out altogether, so it's better to get what you can when you can," Neumann says. Bankruptcy monitoring services can be provided by a specialized collection agency.
Sussmann says one of his most challenging cases involved filing a creditor claim against an elderly owner who died. When the heirs discovered they couldn't inherit anything until the creditors were paid, the overdue amount was paid. “Start to finish, that case took about nine years," Sussmann says. “Sadly, that was not the only creditor claim that had to be filed against an estate."
Depending on an association's governing documents, owners in default may be ineligible to vote on association business or to serve on the board. In some communities, they may be barred from using certain recreational facilities such as the community pool.
“There are things that an association should never do, like turn off the utilities, but I have seen it being done and, in some states, I have been told that it is permitted," says Mitchell Drimmer, a licensed community association manager who specializes in collections. “I don't recommend it. Whether it is legal or not, it's plain wrong."
Collection rules vary by state and can get tricky, particularly for smaller, self-managed communities. A volunteer board in Colorado may not know that a payment plan must be offered, or one in Florida may not realize that a notice must be sent listing all delinquency items by category, Drimmer says.
Late fees or collection costs that might be charged by an association and attorney must be reasonable and could be challenged by a judge. Some governing documents allow interest to be added to outstanding assessments. The amount varies. For example, in Michigan, it's 7%, Neumann says.
If an owner doesn't like how the community is managed, they should run for the board and effect changes.
MAINTAINING RECORDS
It's also important to maintain a thorough record of payment or the accounting process that shows all the charges on a unit or lot, as well as detailed information about how payments were made and when they were paid. To streamline the payment process, Neumann says many communities are setting up same day automated clearing house (ACH) payments or allowing electronic credit or debit card payments to cut down on postage and administrative expenses relating to tracking delinquencies.
“Working with owners to sign up for automatic payments and referrals to state resources have been great options," Sussmann says.
Drimmer says recovering money can be easier using many new software tools that streamline the process. He says his company, Axela Technologies in Miami, makes the collection process cost effective and transparent with online, real-time activity reports available to management and boards of directors 24/7.
The million-dollar question is whether there's a statute of limitation on collections. Drimmer says there are two schools of thought: One says it's the same as it is for any other debt in a state—generally four to six years. Others argue if an association properly adopts a budget, the act of charging the owner an assessment each time effectively restarts the clock and there's no time limit.
Deadlines aside, Drimmer says under no circumstances is it appropriate for an owner to withhold payment.
“This is not a rental, and for people who do not understand the condo/HOA concept, they will soon enough get that education," he says.
If an owner doesn't like how the community is managed, they should run for the board and effect changes, Drimmer suggests. “But for heaven's sake, don't make your neighbor pay for your discontentment," he says.
Pamela Babcock is a freelance writer in the New York City area.