While we handle bankruptcies in the Eastern District of Missouri and Southern District of Illinois, we also monitor national news and trends in bankruptcy.  We do this for a few reasons.  First, rulings in other states may have an impact, either directly or indirectly, on the courts here in the Metro St. Louis Area.  Second, we like to be informed and ready for anything that might come our way.  That being said, there has been an interest ruling in Nevada that may have a nationwide impact on mortgage holders, debtors, and homeowners associations (commonly known as HOA’s). 

It is very common for an HOA to have a secured interest in real estate.  Basically, the HOA fees are to be paid by the debtor.  In the event that they are not paid the HOA can get a lien on the property, and so long as that lien is properly perfected, the HOA could foreclose on the house.  This is true of any secured lender.  For example, let’s say an individual has a home worth 100,000 dollars.  Let’s say that he has two mortgages; the first is 80,000 dollars and the second is 10,000 dollars.  Either the first or second mortgage holder could foreclose.  If the first forecloses it is a relatively simple process where the first mortgage holder sells the property.  If the real estate sells for more than what is owed to the first mortgage holder the proceeds go to the second mortgage holder and then the individual.  If the second mortgage holder forecloses the first mortgage holder must still be paid first.  So, using our example above, the second mortgage holder would not have anything to gain if the house would only sell for $40,000 as the second mortgage holder would not get any of those proceeds. 

What makes HOA’s unique is about 20 states have laws that give the HOA preference over all other mortgage holders.  Using our same example, this means that if a person owed the HOA $5,000 dollars the HOA could foreclose and would be paid before the first or second mortgage holders.  As you might imagine, this is resulting in houses being sold for next to nothing at auctions because the HOA has nothing to lose.  The mortgages are now unsecured and there is little recourse for the mortgage companies and the debts are easily discharged in bankruptcy.   This practice has been upheld by a Nevada Court. 

It will be interesting to watch for a legislative response and what implications this may have nationally.  If you have questions about this, or any other bankruptcy questions, contact your St. Louis Area Bankruptcy Attorney today for a free consultation!