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Working Together to Ensure Assessments are Paid: Collection Efforts Associations Can Take Before Ref
Working Together to Ensure Assessments are Paid:
Collection Efforts Associations Can Take Before Referring a Matter to Collection
By Erin A. Maloney, Esq. Fiore, Racobs & Powers
Associations rely upon payment of assessments by all of their members to meet the financial obligations imposed upon them by their governing documents, and by California law. Unfortunately, many association members do not understand that they are harming their entire community by failing to pay their assessments, and often see their homeowners association assessments as one of the first bills to stop paying when they encounter financial difficulties. Many owners place a much higher priority on keeping their premium cable channels than they do on paying their assessments.
Most community association professionals and volunteer directors see assessment collection as a necessary, but unpleasant task. They meet their duties regarding collection efforts, with their primary focus usually being on deciding the remedy to be utilized -- judicial foreclosure, nonjudicial foreclosure and small claims being the most commonly used options. Attention is then usually turned to which provider will assist the association in its collection efforts, and on sending the matter off to that provider. Often, directors have overlooked their opportunities to take an active role in collection efforts to assist their association before referring a collection matter out.
Perhaps, associations may benefit from redirecting their focus in the early stages of delinquencies. By employing preliminary techniques before referring a matter to a collection professional, associations may reduce their overall delinquency rates, and costs associated with collection efforts. Four important steps are frequently given inadequate attention that every association should consider.
The first step that every association should take in the collection process is to actively communicate with its members regarding the importance of paying assessments, and the consequences if assessments are not paid. Far too many owners are unclear on what assessments are. Some owners believe that they are paying “dues” to use the pool, and that they need not pay if they do not swim. Others think assessments are a tax included in the impounds paid for the members to enable them to resolve a delinquency by including procedures for requesting a meeting with the association’s directors to discuss the delinquency and/or for requesting a payment plan.
A clear, concise collection policy, which sets forth the specific procedures which the association employs will provide clear notice to the members of what they should expect if a delinquency occurs. If a policy contains boilerplate language which simply repeats the language of the Civil Code, then the members will usually overlook the policy altogether. It is more effective to notify the members they will face a lien and legal action to enforce the lien if they do not pay assessments than to provide a list of possible alternatives that may happen.
The third step associations should take is to improve its policies and procedures for payment plans. Payment plans are beneficial to both the delinquent members, who can resolve their delinquency over time, and to the association because partial payments will be received to somewhat improve the association’s cash flow. However, associations must be mindful that payment plans must be carefully crafted to be of a benefit to both parties.
with their mortgage, so they erroneously assume that they are being paid. Associations should communicate to their members what the assessments are used for: maintenance and repair of common areas, operation of the association, insurance, etc. Members may not know that the assessments keeps their property value at the highest possible level, and that if they do not pay, their entire community may suffer.
Associations can include a statement with a welcome packet provided to new members that describes how the association operates, and that assessments fund that operation. Newsletters can periodically remind members of the benefits of living in the project, and the obligations associated therewith. If a member becomes delinquent, the association may consider including in its late notice statements describing the importance of assessment payments and procedures for requesting a payment plan.
A second step that every association should take is to review its collection policy to ensure that it best suits the association’s needs regarding assessment collection. Civil Code section 5310(a)(7) requires associations to include in their Annual Policy Statement “a statement describing the association’s policies and practices in enforcing lien rights or other legal remedies for default in the payment of assessments.” Many associations have an outdated policy, or a policy not specifically tailored for that association’s needs and practices.
Every association should carefully draft its policy so it notifies its members when collection efforts will commence, what actions will be taken, and what some costs are. The policy should be a means to discourage members from becoming delinquent in the first place, lest they suffer charges, a lien, legal action, etc. The policy can also be a resource
Every payment plan must be in writing. Payment plans are contracts: they are an agreement between the parties on how a delinquency will be resolved. The plan must provide the repayment terms, and the consequences of a default. The terms of payment plans must be such that they provide for full repayment of the debt within a reasonable period of time. Have the payment plan carefully drafted by the association’s attorney.
In negotiating a payment plan, often directors focus only on what the member says he or she can pay per month, without considering what will be best for the association. That methodology may cause a plan which is far too long to benefit the association. Costs are associated with administering a payment plan which also must be accounted for in the agreement. If a member cannot afford a reasonable payment plan, it is often best to require the member to arrange for payment, such as a loan from an institutional lender.
Entering a payment plan with a delinquent member is akin to extending credit to that member, to allow them to pay a debt. Just as no bank would extend a loan to a borrower without first confirming their ability to repay the loan, associations should not enter a payment plan without first ensuring the debtor’s ability to make the proposed payments. Associations should require any member requesting a payment plan to provide financial statements, copies of bank statements and/or pay stubs to confirm that the debtor has sufficient resources to make the proposed payments, and that they are committing to pay the most that they can afford. Having the bank and employment information on file will also assist the association in future collection efforts if the owner defaults on his or her payment plan.
Associations should evaluate the debtor’s reason for nonpayment. If a member became delinquent because she refused to pay as retaliation for an unrelated dispute, that member may not be a good candidate for a payment plan unless that underlying dispute is resolved. If the member asserts a hardship, the board should consider the nature of that hardship. If it is ongoing, the member may not be in a position to make any promised payments. If a member asserts hardship, but
his bank statements reflect that he took a recent cruise to Hawaii and frequently goes on shopping sprees, then it may be appropriate to deny a request for an extended payment plan. Associations should be mindful that no member has a “right” to a payment plan; it is a privilege which should be employed only when appropriate, and when both parties will benefit from the plan.
The final technique that associations can employ before hiring a professional to initiate collection efforts for an account is internal dispute resolution (“IDR”). The Civil Code requires associations to offer IDR at several stages in the collection process, so associations are used to including the offer in pre-lien demands, and prior to initiating foreclosure. However, the offer is often buried in a letter and not considered a tool for resolving a dispute. IDR is a procedure whereby a member can meet with one or more directors to resolve a dispute. Making an offer to participate in IDR early in the process may cause resolving the delinquency without cost to the association.
An association can make an offer to participate in IDR at any time; it need not wait until it sends a pre-lien demand. Making an IDR offer when the owner is only one or two months behind may resolve the matter. IDR can be a way to communicate to the delinquent member the importance of payment to the association, and provide a means for the member to explain the reason for her delinquency and her proposal for resolving it.
For IDR to be effective, the board should provide settlement authority to the participating director in advance. That ensures that an agreement can be reached at the IDR, avoiding unnecessary delay. The terms of any payment plan must follow the association’s published standards therefor. If any amount will be waived, that amount should never include delinquent assessments, but associations can consider waiving soft costs such as interest in appropriate cases. As with any other payment plan, any agreement reached at IDR must be in writing.
By focusing on early collection efforts such as those discussed above, an association will increase its effectiveness in collecting assessments. Once a delinquency becomes so large that an owner cannot readily arrange to pay it off, then it becomes much more difficult to collect. Providing opportunities to the members to amicably resolve their delinquency at an early stage will benefit the association and its cash flow.
Ms. Maloney has practiced community association law for over 23 years, and is a shareholder of Fiore, Racobs & Powers, a professional law corporation. She manages the f irm’s Assessment Collection Department, and works out of its Riverside office.
