Tuesday, September 17, 2013

The Price of Avoidance

Recently a client community directed it's management to offer a settlement of 50 cents on the dollar to a delinquent homeowner:  This despite the fact that the debt was recent and had never been pursued via collections.  The Board just didn’t want the hassle and felt that too much money would have had to be spent in legal fees in order to collect.  This type of action (readily caving in to delinquent owners) sends a message to other homeowners about paying assessments.  Those who normally pay will be angered that they are subsidizing others.  Those who don’t pay will be emboldened to push for further concessions.

Another client community also didn’t want to “be mean” to their neighbors, and opted to only file a lien in the courthouse records rather than taking delinquent owners to court.  However, a paper lien is only good for four years, after which the money is barred from collections.  The delinquent homeowners need only wait out the statute of limitations to avoid paying their obligation.  For instances where judgments were obtained (by the previous Board), the current Board refused to garnish wages, bank accounts, rents, or other assets.  Again, the reason given was that this was “too mean”. 

In both of these situations, the Board is violating its fiduciary duty to the Association, and insurance may refuse to cover the Directors if an angry homeowner decides to file a lawsuit.

Instead, these Associations should seek a collections arrangement where the attorney’s fees are paid on a contingency basis, with the attorney retaining a fixed percentage of what is collected.  The Associations will still come out ahead, perhaps collecting 80 cents on the dollar when all is done. 

Community cohesion requires discipline, and unfortunately some homeowners choose to avoid their obligations to their neighbors, whether it is financially or perhaps via a rules violation.  The price of not fully pursuing these matters is greater than any short term savings of Board inaction.

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