Q: Recently our homeowners association lost the dues owed by two owners whose mortgages were foreclosed. On one, the unit owner stopped paying his assessments to the HOA before he stopped paying his mortgage. The HOA placed a lien on the property after six months of nonpayment, but the mortgage lender foreclosed before the HOA could foreclose or otherwise collect the dues. After the unit was foreclosed, we were told that any dues owed were subordinate to the mortgage holder. However, we were also informed that we could still recover the assessments owed from the former owner. Is there anything the HOA could have done earlier – or even now – to recover the dues?
In the second instance the owner passed away and the owner’s heirs chose not to pay the HOA assessments. They informed us that they were going to allow the unit to be foreclosed on by the mortgage lender since the mortgage debt exceeded the property value. What should our HOA have done at that time to recover the dues owed? I realize that both instances are due in part to the decline of home values in our area, but do you have any recommendations for our HOA to keep this from happening again?
A: First, it is important to understand the difference between a debt and a lien. A debt is a sum of money owed by one party to another because of a debtor-creditor relationship. A delinquent debt can often be recovered through a lawsuit filed by the creditor – in your case, the HOA – against the debtor, who in your case is the property owner.
A lien, on the other hand, is a property interest that allows a creditor to collect a debt by enforcing its rights against a piece of property. In the case of a lien on a motor vehicle, the lien is enforced by repossession and sale of the vehicle. With real estate, the lien is typically in the form of a deed of trust or mortgage. Such liens on real estate are usually enforced through a foreclosure proceeding, which allows a public sale of the subject property to satisfy the debt.
It is true that the lien of a first mortgage is usually superior to an HOA’s lien, and the foreclosure of a superior lien will “cut off” the liens of subordinate lienholders (such as an HOA lien or second mortgages).
If the HOA loses its lien rights, it can still pursue collection of the debt from the former owner (as opposed to enforcement of its lien). Neither the foreclosing lender, nor the purchaser of the property following foreclosure, is liable for the HOA assessments owed before the conclusion of the foreclosure process.
In the first case you described, you could track down the former owner and file a lawsuit against him or her for the balance owed up until the time the mortgage foreclosure concluded. This may be a waste of resources if the person cannot be found or does not have sufficient assets from which a judgment may be satisfied. The chances are good that a person whose home has been lost in foreclosure will not have sufficient assets to pay a judgment against him.
In the second case, you can check with the Clerk of Court to determine whether an estate proceeding has been opened to administer the assets of the deceased owner. If so, you can file a claim with the estate administrator for the unpaid assessments. Claims of creditors in an estate proceeding must be paid before any distributions of assets to the heirs.
Charlotte attorney Michael Hunter represents community and condominium associations for the firm of Horack Talley. Email questions to firstname.lastname@example.org. Not every question receives a reply. Find his blog at www.CarolinaCommonElements.com.