Cutting Corners on Bankruptcy Searches Can Be Costly

By following best practices in bankruptcy checks, attorneys protect community associations and their management team.  One unequivocal principle of bankruptcy is that all collection activities must stop when an owner files for bankruptcy protection.  Many community associations may not realize the true cost to a community and/or management company if a collection notice, or even a simple statement, is inadvertently sent to a debtor in bankruptcy. 

A short time ago, settlements in stay violation cases averaged $3,000.  Recently, settlements in these cases are hovering around $7,000, with some even reaching the $15,000 range.  With large portfolios and automated procedures, following best practice for flagging protocols and communications with legal counsel are a must to prevent a violation of the automatic stay and painful settlement checks.

  

By filing for bankruptcy, an automatic federal mandate to stop all collection activity surrounds the debtor.  The automatic stay is a federal court order.  Make no mistake, despite its automatic nature federal bankruptcy judges hold the automatic stay sacrosanct.  Bankruptcy judges will send the appropriate message to any creditor that the judge feels does not implement protocols to prevent even seemingly harmless violations of the automatic stay.  It is a strict liability standard, so the fact that the notice or statement may have accidently gone to the debtor does not matter.  If a notice is sent to a debtor in bankruptcy, the automatic stay has been violated. 

Checking the bankruptcy status as part of each step of the collection or compliance process falls on the shoulders of legal counsel.  Checking bankruptcy status is not the duty or concern of the board members or community manager.  Their duty is to notify legal counsel and properly flag the account to prevent notices and statements from the management or board level.  Lawyers can obtain access to a nationwide government website that will document every bankruptcy filed in the United States.  Bankruptcy checks by lawyers are quick, affordable, and well worth the time, considering that one letter can result in a settlement payment by the association and/or management of $7,000 or more.

Any time or money saved by avoiding title and bankruptcy status research in the proper databases is expended tenfold in the defense of a suit. Electronic searches are an efficient, reliable means to preserve precious community association resources.  By following this best practice, attorneys can help to avoid unwanted litigation against the community association and/or management company.  

Brady E. Ortego, of Roberts, Markel, Weinberg, PC, is an attorney specializing in community association law.  He is a frequent author and educator on issues affecting community associations and is active in community association industry support groups such as the Community Associations Institute.