Kevin W. Bruning, Esq. Theodore M. Gross, Esq.
Mary D. Sump, Esq. Katerina Tsoukalas-Heitkemper, Esq.
John P. Dickson, Esq.* Kristen R. Serna, Esq.
Telephone: (815) 455-3000 Facsimile: (815) 455-3049
*also licensed in WI
Bruning & Associates, P.C.
A Professional Corporation
333 Commerce Drive, Suite 900 • Crystal Lake, IL 60014 1834 Walden Office Square, 5th Floor • Schaumburg, IL 60173
330 East Main Street • Barrington, IL 60010
www.bruninglaw.com
CONDOMINIUM AND COMMON-INTEREST COMMUNITY ASSOCIATIONS GENERAL OVERVIEW OF COLLECTION PROCESS
By Katerina Tsoukalas-Heitkemper [email protected]
September 2013
Assessments are the lifeline of an association as they are generally an association's only source of revenue. The prompt collection of assessments is essential for the operation and maintenance of the association. When owners do not pay their assessments in a timely manner and associations become strapped for money, it may be forced to defer necessary maintenance, forgo certain services, raise assessments and/or levy a special assessment, all of which may impact the value and marketability of properties within the association.
Due to the current economy, boards are faced with additional challenges in their efforts to collect assessments. Mortgage foreclosure lawsuits and bankruptcy filings further complicate the process. Mortgage lenders (and sometimes the homeowners too) are dragging foreclosure lawsuits out longer and longer. This forces the remaining homeowners within the association to subsidize the living arrangements of the delinquent homeowner. Boards are forced to weigh the financial needs of the association with the financial dilemmas of its members. Determining what is in the best interest of the association is not always a simple task.
The general process Bruning & Associates, P.C. follows once an account is turned over for collection is described in the following pages. Please note, however, that this is only a general outline of association assessment collections. Due to the numerous variables that may come into play, it is impossible to discuss all aspects of assessment collection and this outline does not attempt to provide for such. The most important point with respect to the initiation of the collection process is that the board must understand that it has a fiduciary duty to its members to try to collect assessments and a policy should be in place to make sure that this happens.
General Overview of Illinois Law
Illinois is the only state in the country that allows an association the use of a Forcible Entry and Detainer action (an eviction) against an owner for the non-payment of assessments and other common expenses. An association has the power to dispossess (evict) an owner from their residence and rent the property out to satisfy the arrearage (the owner remains the owner of the unit and continues to remain obligated to pay the mortgage and other obligations, if any, on the unit). What this means is that once the Sheriff provides the association with possession, the association has the authority, but not the obligation, to lease the unit to a bona fide tenant (whether the unit has a current tenant or not) pursuant to a written lease for a term not to exceed 13 months from the date of expiration of the stay of judgment. The money collected pursuant to such a lease is first applied to assessments and other charges sued upon in the action for possession plus statutory interest on the monetary judgment, attorneys' fees, and court costs incurred and then to other expenses lawfully agreed upon, including late charges, fines and reasonable expenses necessary to make the unit rentable and lastly to assessments accrued after the judgment was entered until the owner's account is current. Any surplus shall be remitted to the owner. As noted, the association's main remedy is to take possession of the unit and rent it out to recoup its money.
The Collection Process
The collection process typically begins when the association turns over the owner's account to the attorney's office for collection. The turnover consists of receiving a directive to start collection, being provided with the unit address, the offsite address, if applicable, and a current ledger. While the law requires certain steps be taken in the collection of assessments that all attorneys must follow, each law firm establishes their policies and procedures to satisfy those requirements. After a delinquent account is turned over to Bruning & Associates, P.C. for collection, the following represents the basic procedures that are followed by the firm to collect the assessments.
1. NOTICE AND DEMAND FOR POSSESSION. A Notice and Demand for
Possession is sent to the delinquent owner(s) by certified mail (required by law) and by regular mail (as a precaution).
2. LAWSUIT. If payment is not received within thirty days of the owner's receipt of the Notice and Demand for Possession, a lawsuit may be filed.
3. PROVE UP OR TRIAL. Once process of service of the lawsuit is accomplished, the association has the burden of proving that it is entitled to common expenses and the amount of those common expenses by trial or prove up.
4. JUDGMENT AND ORDER FOR POSSESSION. If the association establishes to the court's satisfaction that it is entitled to common expenses and the amount of those common expenses, the court will enter a Judgment and Order for Possession.
1. Notice and Demand for Possession
Time-frame: a unit owner has 30 days from receipt to dispute validity of debt or remit payment
in full before an association can proceed with further collection.
In most cases the association has already sent the delinquent owner at least one letter before the account is turned over for collections. The Forcible Entry and Detainer provisions of the Illinois Code of Civil Procedure require that a Notice and Demand for Possession be served on the owner before a lawsuit may be filed. The Notice and Demand for Possession must be sent by certified mail to the address on record with the association for the owner and "unknown occupants." Service of the Notice and Demand for Possession is effective when a certified letter is deposited in the mail. It is not necessary for the owner or "unknown occupants" to actually receive the certified letter.
In preparing a Notice and Demand for Possession, Bruning & Associates, P.C., conducts a tract book search of the property to confirm the legal owner(s) of the property. The tract book search will also provide if there is a lis pendens recorded against the property. Lis pendens is Latin for "lawsuit pending" and generally indicates that a foreclosure action has been filed against the property. A search is also conducted with the United States Postal Service (USPS) to ensure that the address provided by the board or property manager is a proper address recognized by the postal service. Finally, a limited search of the bankruptcy court for the Northern District of Illinois is conducted to see if the owner(s) has filed for bankruptcy (if an active bankruptcy is found, the association is precluded from initiating a collection action until it receives the Bankruptcy Court’s permission to do so).
By law, once the owner receives the Notice and Demand for Possession, they have thirty days in which to dispute the validity of the debt or pay the debt. Should the owner pay in full, their file will be closed. If a partial payment is received, the association will have the option to accept the partial payment or return it to the owner. When deciding whether to accept partial payments, the association should consider its immediate need for cash flow versus the possible negative effects that accepting the payment could have on future collection efforts.
If the owner disputes the validity of the debt, the attorney must verify the debt which typically entails obtaining a current ledger from the association and forwarding it to the owner with a letter verifying the debt. The owner may also request a payment plan or a waiver of certain charges on their account. It is within the board's discretion to enter into a payment plan or waive charges, except that the Illinois Condominium Property Act provides that condominium associations have no authority to forbear the payment of assessments by any owner.
2. The Forcible Entry and Detainer Lawsuit
Time-frame: typically resolved within 60-90 days from the date of filing (due to effectuation
of service and court not having jurisdiction over matter until service is completed). The stay period on the Order for Possession will also vary between 60 and 180 days.
If payment is not received within thirty days from the owner's receipt of the Notice and Demand for Possession, the association has the option of filing a Forcible Entry and Detainer lawsuit. Such a lawsuit seeks two remedies:
• A money judgment against the owner; and
• An Order for Possession of the property which will allow the association to evict the owner and any occupants/tenants residing in the unit.
A Forcible Entry and Detainer lawsuit is considered a summary proceeding. Consequently, there is little, if any, discovery (i.e. depositions, interrogatories, etc.) during the proceedings and the defendant is limited to the type of defenses he or she may raise.
The complaint will be filed with the Clerk of the Circuit Court of the county in which the property is located. The summons and complaint will then be placed with the Sheriff or a special process server for service of process. Before the association can request a Judgment and Order for Possession against the owner, the owner has to be served with the complaint. In Cook County the Sheriff makes the first attempt to serve the owner. In all other counties, either the Sheriff or a special process server will attempt to serve the owner. Without proper service of process, the court does not have jurisdiction over the owner and/or the unit.
If the summons is returned before the first court date without service, an alias summons must be obtained from the court so service can be attempted again. If, the alias summons is returned before the next court date without service, the law allows the complaint to be served by doing a Notice by Posting. When Notice by Posting is granted by the court, the Sheriff will post a notice of the lawsuit in three locations near the courthouse for at least 10 days. When service is by posting, a money judgment against the owner cannot be granted by the court. The court can only grant an in rem judgment (against the property) and an Order for Possession.
After the owner is served, there are several ways that the matter can proceed and .the process is generally driven by the owner. The owner may:
• pay the entire balance and the lawsuit will be dismissed; • sign an Agreed Judgment and Order for Possession;
• request a payment plan and enter into a Stipulation (court-ordered payment plan); • dispute the amount owed and request a trial;
• request a continuance so they can retain legal counsel; or
• fail to appear in Court or appear in Court but not dispute the amount due.
is attained. However, the majority of cases are resolved relatively quickly.
3. Trial or Prove Up
Time-frame: a trial is typically scheduled within 3-4 weeks (sometimes sooner) after a unit
owner appears in Court to dispute the debt claimed owed by the Association.
If the owner does not appear in court, a prove-up will be conducted. A prove-up is the process by which the association, through its legal counsel, establishes to the court's satisfaction that the association is entitled to assessments, late fees, fines, legal fees and other charges on the owner's account and the amount of such. The attorney representing the association will present documentation to the court for this purpose.
If the owner appears in court and disputes that they owe any money or dispute the amount of money they owe the association, there will be a trial. At the trial a representative of the association familiar with the account will need to be present to testify as a witness. In addition to the testimony of the association's witness, the association's legal counsel may question the owner and will submit documentation to the court to establish what is owed to the association.
4. Judgment and Order for Possession
Time-frame: varies as the Court has the discretion to award a stay period on the Order for
Possession for a minimum of 60 days and a maximum of 180 days.
After the association's legal counsel has established to the court's satisfaction that the association is owed assessments and other charges from the owner, and the amount of these assessments and other charges remain owed, the court will grant the association a Judgment and Order for Possession. It is important to understand that the Order for Possession only grants the association possession of the property, not title. The owner still owns the property and is still responsible for all obligations on the property (i.e., property taxes, mortgage payments etc.). The association then has the right to rent the property for a period not to exceed 13 months, unless further extended by court order.
5. Eviction
Time-frame: varies based on the Sheriff’s schedule. With the exception of Cook County,
evictions are typically conducted within 4 weeks from the date the Order for Possession is placed with the Sheriff for eviction. (Cook County may take up to 8 weeks, sometimes longer)
If the judgment amount and current assessments are not paid within the stay period provided for on the Order for Possession, the association has the option of placing the Order for Possession with the Sheriff for eviction. After the Order for Possession is placed with the Sheriff, the eviction is scheduled. Most cases do not proceed this far. Generally, the threat of eviction is sufficient to compel an owner living in the residence to pay his or her delinquent assessments. If, however, the owner does not come up with the money at the last minute (which quite often a unit owner will remit payment at the last minute resulting in the cancellation of the eviction), the association may proceed with the eviction process.
Note that there is no "self-help" in Illinois; the Sheriff must evict anyone living at the unit and each Sheriff's office has their particular procedures. Generally, on the day of eviction, a representative of the association (i.e. property manager or board member) will need to meet the Sheriff's personnel at the property. In some counties, the Sheriff's personnel remove the personal property from the residence. In other counties, the Sheriff's office requires the association to hire movers and have them present at the time of the eviction to remove the personal property from the residence. In Cook County, the Sheriff requires the property to be safeguarded for a reasonable period of time.
Once the association obtains possession of the property, it has the authority, but not the obligation, to lease the unit to a bona fide tenant (whether the unit has a current tenant or not) pursuant to a written lease for a term not to exceed 13 months from the date of the expiration of the stay on the Order for Possession. Rental income is to be applied as follows:
• Assessments and other charges which were part of the lawsuit; • Statutory interest on the judgment, if any;
• Attorneys' fees and court costs;
• Other expenses lawfully agreed upon (such as late charges); • Fines;
• Reasonable expenses necessary to make the property rentable; • Assessments that accrued after the judgment until they are current.
Issues that may arise during the collection process
There are several events which can occur that can delay, stop or hinder the collection process. A few of the most common are reviewed below.
A. Mortgage Foreclosures
A mortgage foreclosure is an action by a mortgage lender against the owner. The association is a necessary party to the foreclosure based on its interest in the property. The association's interest is usually subordinate to that of the lender.
There are several ways that an association can learn about a pending mortgage foreclosure. The most common way is when the association’s registered agent is served with a summons and complaint from the mortgage lender. A foreclosure may also be discovered by running a tract search or during the monitoring of an owner's bankruptcy. Once the association is notified of a pending foreclosure, it must decide whether it wants to participate in the case or just monitor the foreclosure. The association should consider the amount owed on the unit’s account, whether it believes that there will be a surplus from the judicial sale and where the association is in any pending collection action against the owner.
In order to participate in the foreclosure proceedings, the association must file its Answer and Appearance and thereafter its Affidavit of Lien claimed. If the association participates in the foreclosure, it should be included in the Judgment as a subordinate lien holder to the lender and will be entitled to seek any surplus from the sale of the property at a foreclosure sale a.k.a. sheriff's sale or 'judicial sale. Alternatively, an association could choose to only file an Appearance which will entitle the association to receive notice of any action the lender intends to pursue without having to independently verify the actions the lender will be undertaking.
The Basic Steps in a Foreclosure Case
The foreclosure complaint is filed with the Clerk of the Circuit Court. The owner/mortgagor and other interested parties (such as the association) are served with the foreclosure complaint. Under Illinois law, the owner/ mortgagor has an absolute right to reinstate the mortgage. If the owner/mortgagor pays the delinquency and other costs as provided by the mortgage, the mortgage will be reinstated and the foreclosure action dismissed. Note that most lenders will still permit owners to reinstate their loan up until the foreclosure sale takes place.
A Judgment of Foreclosure is generally entered at least 30 days after an owner/mortgagor and all necessary parties are served. If the owner/mortgagor pays the entire amount of the mortgage and other costs as provided by the mortgage within 7 months of being served with the foreclosure complaint or 3 months from the date of entry of the foreclosure judgment, the mortgagor can redeem (keep) the property.
The judicial sale is held and a Receipt of Sale is given to purchaser at the sale reflecting amount due. A Certificate of Sale is issued when payment in full is made. The Certificate of Sale is subject to confirmation by court. The judicial sale extinguishes the Association's lien for unpaid assessments. The new owner is typically responsible for assessments and common expenses starting the first of the month after the sale. If a surplus from the judicial sale exists, the association, assuming it has participated in the foreclosure and is included in the judgment, will be entitled to try to collect from the surplus.
Once the judicial sale occurs, a hearing is held by the Court to confirm the sale of the property. Upon confirmation of the sale, the Judgment stands satisfied and the court will generally execute a deed to the holder of the Certificate of Sale to convey title.
Illinois law provides a "super lien" when a foreclosure occurs on a property located within an association. Sections 9(g)(4) and (5) (for condominium associations) and Section 18.5(g-1) (for non-condominium common interest community associations) of the Illinois Condominium Property Act allow associations to collect at least a portion of the delinquent common expenses that have accrued on the previous owner’s unit prior to the property being sold at the judicial sale. The Illinois Condominium Property Act provides that the purchaser of a unit either at a judicial or from the mortgagee (lender/bank) will be responsible for paying the common expenses that accrued during the 6 months immediately preceding institution of an action to enforce the collection of assessments as well as the attorneys' fees and costs incurred by the association as a result of any collection action.
Although a court has not interpreted exactly what constitutes the "institution of an action to enforce the collection assessments", attorneys agree that, at a minimum, the filing of a Forcible Entry and Detainer action after the foreclosure complaint is filed, satisfies this requirement. However, other actions by the association may also satisfy this requirement. The association's attorney should apprise the association of the steps it should to take to place itself in a position to be entitled to receive the 6 months of delinquent assessment and possible other common expenses upon the sale of the property. Note that if the association was not named in the foreclosure, the association's lien may survive the judicial sale and the whole amount owed could be collectible from the new owner.
There is a misconception among some owners that their obligation to pay assessments to their association ceases when a foreclosure complaint is filed against the property. That is not the case. The owner is responsible for paying assessments up until the property is sold at a judicial sale (a.k.a. sheriff's sale) and the sale is confirmed by the court (usually 30 days after the foreclosure sale). Since in recent years the foreclosure process is taking longer and longer, associations need to consider pursuing collections while a foreclosure is pending. Not only will the association likely ensure its right to the 6 months of common expense provided by the Illinois Condominium Property Act, but it may have an opportunity to recoup all its delinquent common expenses by renting the property before it is sold.
B. Bankruptcy
bankruptcy filing) and a post-petition ledger (reflecting those common expense incurred after the bankruptcy filing). The owner/debtor remains liable for the post-petition assessments regardless of whether or not he or she is discharged in bankruptcy. Once a petition for bankruptcy is filed, an "automatic stay" prevents any creditor, including an association, from taking any type of collection action against a debtor. The association must immediately stop all collection efforts. If the owner/debtor fails to pay post-petition assessments, the association can either file a motion with the bankruptcy court requesting relief from the automatic stay so it can proceed with its collection efforts to collect post-petition assessments or it can wait until the bankruptcy case is completed and proceed at that point when the automatic stay is lifted.
The bankruptcy case will end with either a discharge or a dismissal. If the bankruptcy is discharged, the owner is no longer personally liable for the pre-petition balance (those amounts that were due and owing on the date that the bankruptcy was filed). However, because the association's declaration is recorded against the unit and the obligation to pay assessments runs with the land, the pre-petition balance remains as a lien against the unit and can be collected in an "in rem" Forcible Entry and Detainer action.
If the owner/debtor misses a filing deadline or does not comply with the Court’s directives, the court may dismiss the bankruptcy petition. If the bankruptcy is dismissed the automatic stay is no longer in effect and the association may proceed to collect both pre- and post-petition assessments as if the bankruptcy petition never filed. Note, however, that the owner may re-file for bankruptcy protection.
Types of Bankruptcy Cases
Chapter 7 - "Liquidation": In a Chapter 7 bankruptcy, the owner/debtor generally turns all of
his or her assets over to the bankruptcy trustee which are then sold to satisfy his or her debts. If the trustee determines that the owner/debtor has no assets, the bankruptcy court will likely grant a discharge of the debts. In such cases, a bankruptcy generally takes between four to six months to complete. Once a discharge is granted, the automatic stay is lifted and the association can proceed with collecting the post- petition balance against the owner personally or may pursue collection of the pre- and post-petition balances against the property in an “in rem” collection action.
The owner/debtor may represent in their bankruptcy petition their intent to surrender the property. Such a representation has no legal effect on the debtor’s continued ownership of the property. The owner/debtor remains liable for all post-petition assessments. If the owner intends to surrender the unit to their mortgage lender, they will also likely stop paying their current mortgage and assessment payments. The mortgage lender will thereafter typically proceed with a foreclosure against the unit. Alternatively, the owner may surrender the unit to their mortgage lender by signing a Deed in Lieu of Foreclosure. Note that the owner's intention to retain or surrender their unit is not binding. If the owner remains current on his or her monthly mortgage payment, the mortgage lender will not typically proceed with a foreclosure against the unit.
Chapter 13 - "Wage earners repayment plan": A Chapter 13 bankruptcy is a much longer
Chapter 13 Plan outlining how they intend to repay their debts. The association should be included in the plan as a secured creditor. If the association is not included as a secured creditor or included for the incorrect pre-petition balance, the association can file an Objection to the Plan to have the Plan revised to include the association as a secured creditor for the correct pre-petition balance. Generally, the Chapter 13 Plan provides for a three or five year repayment plan that is administered through the Bankruptcy Trustee. Once the Plan is confirmed, the Owner will begin making payments to the Bankruptcy Trustee who in turn will distribute the amount paid to the owner's creditors. These payments should be applied to the owner's pre-petition balance. The owner is also required to remain current with his or her post-pre-petition assessments.
When an association receives notice of a Chapter 13 bankruptcy, it should file a Proof of Claim with the court. If it files a Proof of Claim, the association should be included in the repayment plan and should receive at least partial repayment of the amounts reflected in the Proof of Claim. Payments to the association will typically begin within three to four months after the plan is confirmed by the court. The automatic stay remains in effect during the repayment plan period.
C. Tax Sale
If the owner fails to pay his or her taxes, the unit could be sold at a tax sale. If this occurs, the association's lien for unpaid assessments is extinguished. The new owner is responsible for the assessments beginning the first of the month after the date the tax deed is issued.
©Katerina Tsoukalas-Heitkemper
