During the tough economic environment of the past few years, many condo owners  have faced job losses, pay decreases or just financial uncertainty.  Unfortunately, this sometimes leads to owners not paying their common charges.  

 Unpaid, overdue debt that is not collected can wreak havoc on a condominium  association. In small communities, it could quickly cause the association to  have trouble meeting operating expenses. Even larger associations will  eventually feel the effects of the shortfall if multiple units fall into  arrears.  

 “No one wants to throw anyone out of their house, which is why there are steps to  warn and help people,” says attorney Mark A. Sank of Mark Sank & Associates, LLC in Stamford, Connecticut. “They have to make payments because the board has a responsibility not to expose  the association.”  

 It’s vital for boards and managers to take a proactive role in collecting common  charge arrears to ensure that their condominium associations remain financially  stable.  

 “The best way to protect yourself is to have a collection procedure in place,” says Jim Toscano, PCAM, president of Property Management of Andover, Inc. in  Lawrence, Massachusetts. “You need to keep people educated. We have a very fast turnover [in  Massachusetts] and if funds are not received in a timely manner, they go to  collections after five weeks.”  

 Attorney Daniel S. Nagel, principal in Cohen and Wolfe’s Common Interest Communities Group in Bridgeport, Connecticut, says that  everyone in the condo should understand the collection procedure from the time  they first move in—and many times it’s written in the bylaws.  

 “Associations should have a written procedure that is disseminated to everyone so  that people know exactly the way things are done, and more importantly, that  things are done consistently to all unit owners,” he says. “People need to know the rules of the game.”  

 First Steps

 According to David J. Levy, PCAM, president of Sterling Services in Holliston,  Massachusetts, each board has to vote in their collection policy, but in  Massachusetts, the steps on collection have been the same since 1993, when the  Super Lien (see sidebar) law went into effect.  

 “Typically, a $50 late fee is posted on the 16th of the month, as fees are due on  the first and a two week grace period is more than fair,” Levy says. “Statements should be mailed out after the late fee by the 25th of the month.”  

 Sank has been representing condominiums for more than 25 years and has his  management companies on a routine that seems to produce results.  

 “The common charges are always due on the first of the month and late by the  10th. When that comes and goes, I recommend that the management company send a  late payment notice and notify them of the fine,” Sank says. “The next month, a statement will go out showing they owe two months, and when  the 10th comes again, and it’s still not paid, they will send one more ‘last chance’ letter.”  

 Sometimes people will call and try to work something out, but if there’s still no response or attempt to pay, it’s turned over to the association’s lawyers.  

 Legal Lessons

 Once Sank takes control, he sends out a 30-day demand letter and includes a  small legal fee. The letter has a good response rate because now owners see  that the association is really serious. At the end of that period, if no money  is collected, he recommends commencing foreclosure.  

 “The reason we do it on such a tight basis in Connecticut is that there is a  six-month super lien,” he says. “That’s why we start the action on the third month and we can get a judgment before  the six months are exposed.”  

 Last year, Connecticut changed its law, so that associations are now required to  wait at least two months before starting foreclosure proceedings — because too many attorneys were jumping the gun and filing after just one month  of someone being late.  

 “If at any time, in response to the letter they contact us—maybe they had a medical emergency or lost their job—if they can set up a payment plan and pay something and be current going forward  we will accept it,” Sank says. “  

 In Massachusetts, under state law, after 60 days, as the third condo fee is  being applied, the trust’s attorney contacts the homeowner in writing and a very modest legal fee is  added to the money owed.  

 “Typically, this works 25 to 50 percent of the time,” Levy says. “If after 10 days, someone has still not paid, the bank is notified, which  requires running the title, as mortgages are frequently bought and sold.”  

 Costs Begin to Climb

 While the legal fees are a bit more, they are still manageable and this step  normally has much better results.  

 “This works 90 percent of the time, as the bank simply pays the condo association  and adds that amount to the borrowers’ balance,” Levy says. “If the homeowner and the bank do not pay from these two letters, then the  collection case goes in a very different direction—court involvement is now needed.”  

 This is when the legal fees start to be significant. Expenses include a title  search, preparation of a summons, a court filing fee, attorney fees and an  appraisal. That can easily add up to $1,200 to $2,500. The end result if the  bank does not intercede on behalf of the homeowner will be a foreclosure  auction.  

 “Let’s assume the owner’s common charges are $200, and they get behind $600; the minute it goes to a  lawyer and he gets involved with the letter, the fees are going to be more than  $1,500 before you know it,” Nagel says. “Obviously, if you are so down and out and you don’t have the money, it doesn’t make that much a difference because you are probably not paying your mortgage  either. But if that’s not the case, I think people will make some arrangement for payment before the  attorney’s costs come into play.”  

 An association’s best method for striking fear to the delinquent payer to collect common charge  arrears is filing a lien against the unit and foreclosing on it. Once filed,  the lien will protect the condo by blocking the unit owner from selling or  refinancing their unit without first paying off his or he arrears to the condo  association.  

 When a condominium's lien is filed, the condominium becomes a secured creditor  under the Federal Bankruptcy Code so if the delinquent unit owner files for  bankruptcy, the condominium will ultimately get a higher percentage of the debt  paid as a secured creditor than if it didn't file a lien.  

 Cause and Effect

 Even the best-run condos will most likely face this issue eventually and it’s important that there is a plan in place to make up for the missing money.  

 “You may need other homeowners to pick up the slack or you are going to have to  dip into the capital account and savings to make up for it,” Sank says. “If you have several homeowners that aren’t paying, it can really make a big impact.”  

 Other effects of non-payers are that the association may need to stop  non-essential services like landscaping, painting or even shut down a pool if  the arrears situation gets tight.  

 “You should never take the money from reserves; you can’t rob from the future to pay now,” Toscano says. “If worse came to worst, you delay service. You need to do your best to cut back  on things that you might not be used to cutting back on.”  

 Confidential Issues

 Legally, it’s common property but ethically, it’s private information, so revealing to others that someone is late with their  payments is a judgment call on the part of the association.  

 “Every association is different. Some choose to publish the information and some  keep it confidential for as long as they can,” Sank says. “They are all neighbors and they want to get along, so they don’t want to go and advertise difficulty and create a bad situation.”  

 Sank does say that for a repeat offender or someone who has fallen deep in  arrears, the board needs to tell the other homeowners because it impacts the  association as a whole.  

 After all, if a condo association is expecting a certain level of collection to  fulfill its budget, and the money does not come in, things can get problematic  in a hurry. The bottom line: an aggressive collection policy is important to  keep disasters from happening.   

 Keith Loria is a freelance writer and a frequent contributor to New England  Condominium.