In a recent decision by the United States Bankruptcy Court for the District of New Jersey, the Court ruled that condominium association liens are only limited to a six-month priority over a first mortgage
. What this means for homeowners is that a condominium association lien can be stripped off the residence in a Chapter 13 plan after the six month period.
In the case, a New Jersey couple filed a secured claim of $18,761.76 for its recorded liens, but did not have sufficient funds to pay the amount in full. Therefore, the defendants proposed a plan to pay the condominium association $1,494 for the amount of a six-month priority, as listed under New Jersey law.
However, the condominium association then rejected the plan by claiming that it was in direct violation of the anti-modification provision listed in USC 1322(b)(2). In accordance with this provision, the association argued that since the residence was their sole collateral and that New Jersey law partially secures the lien, they were owed the $18,761.76 in full.
Ultimately, the Court ruled that any condominium association lien is consensual between the debtor and creditor. Therefore, the condominium association lien was subordinate to taxes and first lien holders on the unit, a decision that reversed the previous rule of “first in time, first in right”
What it means for you
Mark and Ronda Rones’ case was a milestone for New Jersey because it was the first of its kind in the state. However, it establishes a precedent for several cases dealing with condominium association liens nationwide. The Court’s decision was also a significant win for debtors because this second lien can be stripped off as an unsecured debt. However, despite the fact that the Court cited language that a condominium association lien is a secured debt, the decision came down to the provisions in USC 1322(b)(2), where the rights of secured claims holders can be modified. According to a press release from Bruce Levitt of Levitt & Slafkes, the condominium association lien is not a secured debt and therefore not subject to the debtor’s Chapter 13 plan
“It is a common problem that condominium associations take the position with the bankruptcy court that their liens are a secured debt that must be paid in full under a Chapter 13 Debtors’ Plan,” Levitt noted. “For the Debtor who is struggling to cure mortgage arrears or just stay current on their mortgage debt, being forced to pay the lien claim may often be the difference between confirming the Plan or not.”
The Court also cited a priority listed in the Condominium Act that makes the security of the lien applicable for only a six-month period. Therefore, if the first mortgage exceeds the value of the residence, homeowners are allowed to strip down the condominium association lien with only six months of regularly scheduled monthly payments, and the remaining debt is deemed unsecured.
Are you a creditor in a bankruptcy? Have you been sued by a bankrupt? If you have any questions about your rights, please contact me, Joel Glucksman, at 201-806-3364.