Fallout and repercussions from the unprecedented bust in the real estate and mortgage industries are still dogging condo associations all over the country.
Within community associations, owners continue to default on both fees and mortgage payments, and lenders are delaying foreclosure because they don't want to take properties back and assume responsibility for condo fees.
The worst of the fallout was in those areas that had enjoyed the biggest boom—especially parts of the west and Florida (which has over 20,000 condo associations). In Fort Lauderdale, one attorney reports on an association where nearly 80 percent of the units have fallen behind, and a unit owner lent money to the association to help pay the bills. Another lawyer knows of at least eight condo associations in southern Florida that have filed for some kind of protection from creditors with some sort of bankruptcy filing.
However, where delinquencies are threatening the interruption of essential services, bankruptcy will only buy a little time—and not be cost-effective. Bankruptcy is intended to help organizations that are drowning in debt, not those suffering from a shortage in revenues. Legal experts say Chapter 11 bankruptcy won't help associations, since it’s intended to keep creditors at bay until a company restructures its finances. If it’s an income problem and not an expense problem, Chapter 11 won't work.
In spite of that, stressed-out associations are finding ways to test bankruptcy law and their efforts could lead to even more litigation in future years. Associations start considering bankruptcy when the remaining solvent owners in a community have to pay far more than their share in assessments and fees, forcing them into delinquency. Then it becomes practically impossible for the association to borrow money and consequently, owners suffer when FHA or Fannie Mae deny insurance on sales of units.