Leaving home? A bankruptcy discharge may not protect you from association dues or liability claims

We see many people who file bankruptcy but decide to move out of a home they cannot afford. As I have said elsewhere, this is not always as simple as it looks and there are traps that even a bankruptcy discharge will not protect you from.

A bankruptcy discharge only discharges those debts that arose before the bankruptcy filing. But consider this scenario. Homeowner H files a bankruptcy then moves out. The home is in foreclosure but it takes another year after the bankruptcy was filed before a Sheriff Sale. Until then, H still owns the home. The home is subject to a condominium or common area association (also called a homeowners association). While the bankrutpcy will discharge debts owed such an association as of the date the bankruptcy is filed, all the association dues, fees or assessments that arise after that filing until H is no longer the owner of record (ie until the Sheriff Sale) are still his obligation. And those “post-petition” debts are not discharged. H will get sued by the association. Any unpaid dues or fees incurred after the bankruptcy can be collected.

Another nasty surprise can arise from lack of insurance. We always tell homeowners to stay in the home even after a bankruptcy, as close to the date they have to move out as possible. Why? Because most homeowners insurance policies have clauses that can result in no coverage if the home is vacant for more than a specific period of time or if the homeowner does not notify the insurance company that the home is vacant (When they get this notice, a cancellation notice usually follows). Vacant properties can be insured, but such insurance is very expensive.

Why is this so important? Consider what would happen if the vacant home catches fire after H has moved out and when he has no insurance. All the neighboring homeowners whose homes were damaged will sue H. H did not discharge these claims in bankruptcy because they did not exist when the bankruptcy was filed. Without insurance H has to pay a lawyer to defend himself, and pay any verdict. Bad news!

Many people tell me that they are covered because the mortgage lender got insurance coverage. If this is not the normal homeowners policy, but instead is “force placed” insurance, it only covers loss of the property and is there to insure the lender gets paid if its collateral is destroyed or damaged. Such policies have no protection for the homeowner.

These are all examples how it pays to sweat the details and get the right advice. For those who live or work in New Jersey or Eastern Pennsylvania, Neuner and Ventura LLP is able to help. For more on related subjects, check out our website and blog.

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