One of the more complicated issues that occasionally faces an association is what to do if a homeowner becomes delinquent in paying their monthly common charges. While financial problems are a burden on the homeowner first and foremost, the effects of their late or missing payments unfortunately stretch far beyond their personal budgetary problems. Delinquencies can have a serious effect on the community's upkeep and economic future. Homeowners' bad debt can force common charges to be increased to make up the deficit, and in turn, this debt can negatively affect the association's credit rating.
"Most associations have established a credit rating, and at some point they may need to take out a loan for a capital project," said Gary B. Rosen, CPA and director of the community association practice at the law firm of Wilkin & Guttenplan, P.C. in East Brunswick. "A low credit rating may affect their ability to get a loan. Ultimately, the bad debt also affects the marketability of the community. If you have an association with a large deficit, someone is less likely to buy a home in that community."
And there's more to it than just a declining credit rating, says Rosen. Delinquent association dues and common charges also increase the likelihood of special assessments and increased charges for the entire community—which can translate into another point against an association trying to attract new members.
Laying Out the Rules
When new association residents purchase a home, they should receive a copy of the master deed and community bylaws that clearly explain the consequences of non- or late payment of common charges. These consequences include late fees, liens on the unit, and in the worst cases, possible foreclosure on the unit.
Foreclosure, however, is the last thing anybody wants, and is thus a relatively rare occurrence. "If a resident is really struggling," says Rosen, "they should go to the board and structure a payment plan." To help economically troubled residents, Rosen continues, some associations have instituted amnesty programs that permit the homeowner to make good on their debt by a certain date and—as long as that date is met—waive any accrued late fees. Associations typically assess a homeowner an average late fee of $25 to $50 per month, but that can quickly add up.