June 2009

Sometimes it pays to be nice, and that can be especially true when you've got delinquent owners. Not all people behind in their assessments are lazy deadbeats who are happily skipping away from the financial mess they've created. Some are responsible homeowners who've suddenly found themselves in financial trouble and want desperately to fix their financial problems. (See our related article on such a case.) Often, setting up a repayment plan is the best solution for you and the indebted homeowners.

However, if you're willing to work with delinquent homeowners, make sure you create a plan that protects your association and that homeowners are likely to follow. Here are some tips.

1) File a lien first. "Once you have someone who's fallen a month behind, move toward prompt collection activity," says Marc Andrew Landis, a partner at Phillips Nizer LLP in New York City who advises associations and co-ops and is a member of the executive board of the Council of New York Cooperatives and Condominiums. "The important part is taking out that lien. In many jurisdictions, the association's lien is going to be behind the mortgage and income tax liens, but you must establish lien priority by filing record notice of your association's lien so that everyone else knows you're third in line. Even with a payment plan, I'd file a lien because it protects me from anybody else getting ahead of me in getting the money. If the debtors are getting sued because they didn't pay a credit card bill or are behind on their leased car, I want my lien to be ahead of those judgments."

2) Ask for a plan. "The smartest thing to do is to ask your attorney before you agree to the plan," says Nancy Polomis, a partner at Hellmuth & Johnson PLLC in Eden Prairie, Minn., who advises associations. "When I have debtors call me and say, 'I got your demand letter. I'm willing to pay, but I need to do it over time,' I'll ask them to submit a plan in writing. If they have to write it down, there's no argument over what they've agreed to, and I'll make a reasonable assumption that they're offering to pay what they're able to pay."

Though it sounds crazy, Polomis has had homeowners agree to pay a monthly amount and then default immediately. "I've seen owners say, 'I'll pay $400 a month starting next week' and then default on the first payment, saying, 'I don't have the money.' Then why did you agree to pay it?" she asks. "That infuriates the board and makes board members skeptical of any future plan the owners offer."

3) Get documentation. "For a payment plan to be the right solution, you have to have all the right factors lined up," says Landis. "You need to determine the homeowners' ability to pay and get the assurance that they're not going to take other steps, like taking out a credit line, to prejudice your position. So you probably want to see the status of their mortgage, a credit report, and a pay stub."

4) Create documentation. Put your agreement in writing. If the board accepts the owner's plan, Polomis sends a letter confirming all the details: "The board has accepted your plan subject to these conditions: The payment plan is X. Your first payment is due on Y and on Z every month thereafter." The letter will also address late charges, which may not accrue while the owner has a past due balance. Or they may continue to accrue, but after the account comes current, the owner may be able to petition the board to get late fees waived. It also addresses the form of payment. "Are we going to take a personal check? Probably not," says Polomis. "We'll state that the plan is conditioned on the automatic withdrawal of current payments from the owner's checking account."

5) Get a confession of judgment. "A confession of judgment sets out the payment plan and then says, 'If I don't pay according to the plan, the association can immediately file this document with the court and get a judgment against me without further notice to me,'" explains Polomis. "The association doesn't have to go through the trial process. It files an affidavit that the owner defaulted, and then there's a judgment."

Some associations choose not to pursue a confession of judgment, but Polomis thinks that's a mistake. "They don't want to pay attorneys' fees, but it can come back to bite them," she says. "Even though in most cases you can assess the costs of creating and filing a confession of judgment to the defaulting homeowners, the association is still responsible for paying those fees and costs. Some associations have a very limited budget, and they'll take the calculated risk that they don't need one. For some, they feel as if they're throwing good money after bad instead of taking an aggressive approach to collections. Sometimes they know their debtors better than I, saying, 'She was out of work and just got a new job, and we have every reason to believe she'll pay because it was never an issue in the past.' I can respect that, but I—being the debt collector—am a little more cynical."

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