By Steven A. Silverman and Elizabeth L. Hileman

Why is it taking so long to collect our delinquencies? What do you mean we took action against the wrong owner? Do we really have to let a delinquent owner continue to use the pool? Why can’t we collect on that judgment?

These are frustrating questions – questions too many board members, managers, and attorneys ask when collecting assessments. Nothing is more alarming to board members than a growing delinquency problem that isn’t being solved. While there is no magic solution for collecting delinquent assessments, here are a few tips to help turn your delinquencies into dollars.

1.  Establish A Collection Policy.

Believe it or not, many associations do not have an established collection policy. In other words, nobody knows when collection actions will be taken, whether accounts will be referred to an attorney, or whether the community even understands the board’s practices.

A written collection policy is essential. The policy should explain when payments are due – the first day of the month, for example – what happens if payments are late, and how the payments will be applied. It should state what type of notice is provided to the delinquent owner (for example, a notice of intent to lien), who provides the notice, and when a case will be referred to the association attorney for legal action. It also should clearly specify that each owner is responsible for collection costs and explain the late fee or interest that may be applied to the account.

Once a policy is established, publicize it. A "get-tough" policy is useless if the community doesn’t understand it. Explain to owners that in some cases collection fees may cost more than the assessment itself. Distribute the policy in a mailing to all owners or include it with your annual meeting notice.

Next, use the policy. The board must make sure it is implemented. If the policy says management should send a letter to a delinquent owner at the end of 30 days, then the board should insist on knowing whether this has occurred.

The same principle applies to the association lawyer. Is the attorney proceeding with the steps outlined in the policy for collection?

A policy frees the board of directors from case-by-case involvement. Once a policy is in place, the board rarely has to be involved in individual decisions unless it chooses to.

2.  Copy Checks Sent to Pay Assessments.

At least once a year, photocopy a check from each owner in the association, regardless of whether it’s delinquent. Since you never know who will be your next delinquency, the information on the check, such as the bank name, account number, and alternative address, may prove valuable when you are attempting to collect a delinquent account. If you do not have any information in your files, it may cost between $100 - $200 for that information from a "skip trace" service at a later date.

3.  Get Owners’ Daytime Phone Numbers.

Just because you have a judgment on paper doesn’t mean you’ll be able to collect it – which is a major source of frustration. One way of collecting a judgment is by attaching wages. All wages, except for those of certain institutions, such as the World Bank, are subject to attachment. In most jurisdictions, a collection can receive up to 25 percent of a debtor’s "disposable" wages. In other words, after the employer has withheld obligatory taxes, the association is entitled to 25 percent of the remaining balance. But, if you don’t know where they work, you can’t attach their wages. Therefore, ask all owners in the association, delinquent or not, to provide a daytime phone numbers. You also should keep this information for emergencies, but it is extremely helpful if you are trying to track down an owner for collection purposes. Send a form to owners asking that they provide this information to you or include it as part of an existing pool, car, or pet registration form.

4.  Don’t Wait Too Long To Take Action.

Our firm often receives collection cases involving owners who’ve been delinquent for months. How long is too long before taking action? That depends. Associations should send reminder notices to owners within the first month of a delinquency since it costs little or nothing to do so.

Determining when the association should turn over an account to an attorney depends on several factors. First, what is the amount of the assessment compared to the cost of collection? If your assessments are $30 per month and an attorney will charge $90 for an initial demand letter, you may want to wait three or four months before turning it over to an attorney. That way, the collection cost is not greater than the amount being collection. Obviously, if your assessment if $300 per month, you may want to turn the account over sooner.

The association’s cash flow may be another factor. If you have a high delinquency problem – for example, 15 percent o more of the owners are delinquent – this can severely affect your cash flow and you may wish to speed up the collection process.

Another factor is the amount of time an account is delinquent. If you want to send a message to your community that you’re prepared to get tough on assessments, you can not allow an owner to go six months without making any payments. Many owners won’t take the association seriously, particularly those owners who owe large amounts. Many owners will respond if they believe the amount of money due is repayable through a reasonable repayment agreement. However, if the first letter to an owner is for $750 - $1,000, the owner may not respond. If the owner is not responsive and the delinquency continues, the association faces a significant loss of money if the owner files for bankruptcy or the lender forecloses on the home.

5.  Record the Owners’ Correct Names.

Often, management or the board does not keep an accurate record of all owners or a unit or lot. Sometimes the association received inaccurate information when new owners move in or it inherits it from another management company. Regardless of how it happens, you need this information. In Maryland, for example, you need to notify all owners of the property to place a lien. If your letters only include the name of one of the owners, you may run into a legal problem.

You can obtain other information about where owners live. Since all owners are equally responsible for the entire debt, you may recover from at least one of the owners. Get a copy of the deed to the property from your local land records office up front.

6.  Be Wary of Checks Marked "Paid in Full".

Sometimes a delinquent owner will mail in a check and indicate that the account is paid in full or covers all assessments and legal fees through a specific date. If you cash this check, it could be considered an "accord and satisfaction." A court could find that you accepted this as payment in full, thus waiving any other charges on the account. While it may be tempting to cash the check, chances are good that the delinquent owner is trying to deceive the association.

7.  Record Liens on Properties with Delinquent Accounts.

This may seem simplistic, but many associations do not record liens on properties. If the association has a recorded lien on the property, it will be in a better position to collect monies if the owner sells or refinances the property because the settlement attorney handling the transaction will be notified immediately if there is an outstanding arrearage.

A recorded lien also will improve the odds of collecting if the owner files bankruptcy or the lender forecloses. Even in a Chapter 7 bankruptcy, a lien is not discharged. Eventually, the owner must pay it off when the unit is sold, or if it is foreclosed. If the owner files a Chapter 13 Bankruptcy, the association is a secured creditor and has priority over unsecured creditors.

If the lender forecloses, the association can collect monies if there are surplus proceeds. However, if there is no lien in place and the property is sold to a third party, you will have no claim to those surplus proceeds.

8.  File Suit Against Delinquent Owners.

Many associations go through the lien process and take no further action. In an era of minimal property value increases and 90 percent loans, there is usually little equity in a property to allow a foreclosure.

File suit. Often the delinquent owner will respond when they are served.

9.  Let Your Attorney Handle It.

Once you turn over an account to the attorney, the association should not communicate with the debtor. Communicate only through the attorney. Don’t discuss repayment agreements, the amount of collection costs, or payoff information. Many times, you may have incurred collection costs that have not yet been billed by the attorney. Refer calls to your attorney. As attorneys, we can’t tell you how many times owners have contacted us to say they’ve worked out an agreement with management, or owners tell management they’ve reached an agreement with us. Working only through the attorney will avoid delays in the collection process.

10.  Take Away Privileges.

Nothing is more frustrating than seeing a delinquent owner soaking up the sun at your community pool. Check your documents to see if you can withhold the use of common facilities if an owner is delinquent. Many association documents have specific restrictions that allow the association to withhold pool passes, recreation passes, even parking privileges. Because this is such a significant restriction on the use of facilities, however, it probably is not permissible to withhold these privileges without a specific provision to do so in your documents. But withholding privileges is effective. You’d be surprised how many people are prepared to pay if they think they won’t be able to swim.

Withholding assessments is similar to many strategies for collecting assessments: you can be fair but also aggressive in your collection efforts.

Reprinted with permission from Common Ground Magazine, November/December, 1997, a publication of the Community Associations Institute. Copyright 1997 Community Associations Institute

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