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Liens, Foreclosures, and Payment Plans, Oh My! Properly Managing HOA Funds During Covid

Though filing claims of lien against property owners isn't something that associations ever want to have to face, the reality is that it will likely become a common occurrence in the coming months as we see more and more people face financial hardships due to the Covid-19 pandemic. Board members charged with navigating this process must be sure they’re protecting the association’s financial interests by following its collection policy, while at the same time treating members with kindness. Additionally, the association must be willing to be flexible and offer alternative arrangements if a member's situation warrants such. With a few adjustments to processes, policies and attitudes, and some strict attention to detail, associations can ensure that they're protecting the community's assets while at the same time treating its members with care.

Claims of Lien
When faced with delinquent property owner accounts, perhaps the most powerful tool community associations have available is filing claims of lien. The most important components of filing claims of lien are that they need to be filed promptly and they need to be filed correctly. If these things are overlooked, the association could end up finding itself at a disadvantage.

Prompt and Proper Filing of Liens 
So, how do you ensure that your association has properly filed its claims of lien? First, all proper prelien notices must be sent once an account has become delinquent as these are required to both file the lien and to be eligible to recover attorney's fees. Filing the lien properly secures all sums that are due to the association both now and any that may come due later as the lien is enforceable for three years. 

If liens are not promptly and properly filed, the association is putting itself at risk. If there is no lien on record and a delinquent homeowner files bankruptcy, sells the property, their lender forecloses or there are additional government moratoriums put into place, the association is not going to be entitled to recover the money its owed. Simply put, the only delinquent amounts that associations shouldn't protect with a claim of lien are amounts that they don't mind losing - and this may be a bit difficult to explain to the membership in the future. 

Interest and Late Fees
One thing that board members may consider in an attempt to collect delinquent amounts is waiving interest and late fees. However, it is not recommended that "blanket waivers" be issued because, again, each member's situation needs to be considered individually. In a previous article, we used an example where a member had been delinquent for three years and their delinquency was clearly not pandemic-related. In that instance, waiving late fees and interest charges probably wouldn't be appropriate and would cause other members to have to fund the deficit.

However, case-by-case waivers of both interest and late fees (or just one of those) are worth considering as they may be incentive for immediate full payment. The key here is setting a specific payment deadline for the offer to remain good. Another option associations have is to allow for installment or deferred payment plans. With these types of plans, the association might offer a full or partial waiver of the interest or late charges. Whichever option your board decides to go with, remember it is essential that the offer is very clear and specific and that the charges are removed only upon full compliance with the terms of the offer. 

Foreclosure
Foreclosure is, of course, another action that community association boards can take against delinquent property owners. This action requires specific authorization from the board and is one that should be carefully considered not so much in the sense of "can we?", but "should we?". It is recommended that boards considering foreclosure action assess the probability of payment being received if foreclosure proceedings are started. For example, if you have an abandoned property with a very high balance due and an occupied property with a lower balance due, you're more likely to get a response from the occupied property. Board members should choose wisely - foreclosure is only effective if the owner cares about the action being taken and is able to make payment. This is especially important right now because, the reality is, some people are simply going to be unable to pay.

Installment and Delayed Payment Plans
As we've said throughout this piece, associations should do their best to accommodate Covid-19 hardships, and these accommodations may come in the form of installment or delayed payment plans. However, being accommodating doesn't mean boards have to take property owners at their word. In fact, board members should do their due diligence by verifying hardships whenever possible. This includes requiring written requests and keeping records of such. If a payment plan is approved, it should still be secured with a claim of lien. It is essential that the payment obligation is secured and perfected, as even the most well drafted payment plans don't establish what a claim of lien does. 

When a payment plan is allowed, preparation and administrative costs may be included in the sum owed to the association and these costs may be collectible up front or folded into the payment plan. Of course, the more someone can pay up front the better, as the association will begin recovering costs immediately. But unfortunately, there will be defaults so, again, it's a good idea to get as much up front as possible. Another recommendation is to require future payments be made by bank draft so that they're received automatically, and notice will be received if a payment doesn't arrive. 

Payment Plan Paperwork
The accuracy of the paperwork involved in a payment plan is of the utmost importance. All details of the plan should be in writing, signed by all parties and notarized. There also needs to be confirmation of any past claims of lien or if the owner is consenting to the filing of a new claim of lien. Further, the agreement needs to specifically confirm that the claim is valid, and all appropriate provisions must be included. These documents must be comprehensive because special arrangements are being allowed and it is prudent for the association to get these additional assurances. 

Some other things that should be addressed in payment plan paperwork are when payments are to begin, when they're to be made and payments of future charges (things like increased or special assessments). Be sure to include protective terms such as admissions of liability, consents to enforcements, waivers and releases. Overall, it is best to have an attorney prepare these documents. This ensures maximum protection and gets the claim of lien on the record properly. 

At the end of the day, community associations aren't out to file claims of lien against or foreclose on their members; however, there are association bills that must be paid and community assets to be maintained. In these trying times, well-intentioned board members will act with care and compassion when approaching members who have encountered financial difficulties over the past months while at the same time maintaining their fiduciary duty to the association as a whole. By ensuring that all proper steps are followed and being flexible with members facing hardships, board members will be able to successfully navigate the lien and foreclosure processes. 

For more information on claims of lien as addressed in North Carolina’s Planned Community Act, visit here. They are also addressed in NC’s Condominium Act here. In South Carolina, various types of liens are addressed in the Code of Laws, Title 29


If your community association has members facing financial difficulties due to the Covid-19 pandemic and your board would like to discuss its options, reach out to your CAMS Community Manager at 877.672.2267 or via your owner portal for trusted guidance.