This week, I am digging deeper into the bankruptcy world to discuss the Automatic Bankruptcy Stay.  I’m guessing you are not a stranger to this term and that at some point you have been told that you cannot do “XYZ” because of the Automatic Bankruptcy Stay. But, what is that?

The Automatic Bankruptcy Stay is imposed by 11 US. Code § 362, which is a federal law and applies in both Washington and Oregon. Once an owner/debtor files their bankruptcy petition with the Court, the Automatic Bankruptcy Stay is effective immediately.  The Automatic Bankruptcy Stay is very broad and it prohibits the continuation or commencement of almost all actions against the owner/debtor or the lot/unit.  This means that all collection actions, whether by the Association or by a collections attorney or agency, must cease until the Automatic Bankruptcy Stay is lifted or expires.  Even sending a courtesy notice that contains the full balance owed, including amounts becoming due prior to the bankruptcy filing, could be considered a violation of the Automatic Bankruptcy Stay.   For this reason, once the Association receives notice of an owner/debtor’s bankruptcy filing, the account should be flagged to ensure that notices that could be considered a violation of the Automatic Bankruptcy Stay are not sent until after the bankruptcy is resolved.

All that being said, the Automatic Bankruptcy Stay only applies to a “collection action” and does not apply to “non-collection” correspondence, such as budget notices, annual meeting notices, or violation notice letters. Most of the time, the Association can continue to send invoices for assessments as they come due in the normal course, as long as the notice does not contain any mention of the past-due amounts that became due prior to the date of the bankruptcy filing.  The Automatic Bankruptcy Stay prevents the Association from requesting payment or attempting to collect amounts becoming due prior to the date of the bankruptcy filing.  In some rare circumstances, the Automatic Bankruptcy Stay may apply to invoices for post-bankruptcy assessments, so it is a good idea to check with your attorney to verify whether the Association can continue to send invoices for post-bankruptcy assessments to the owner/debtor.  All “non-collection” correspondence should continue to be sent by the Association to the owner/debtor, even if the owner/debtor is in an active bankruptcy.

It is important to be aware of the Automatic Bankruptcy Stay because if the Association is found by the Court to have willfully violated the Automatic Bankruptcy Stay, the Court could award enter an order against the Association for actual damages, including the owner/debtor’s costs and attorneys' fees, and possibly punitive damages. The Association would be required to pay these amounts to the debtor and the amount cannot be offset by the amounts the owner/debtor owes to the Association.

If you receive notice that an owner/debtor has filed bankruptcy, please contact your legal counsel immediately.  And, as always, if you have any questions regarding the Automatic Bankruptcy Stay, or would like to discuss bankruptcy or collections in general, please do not hesitate to contact our office.