Can the HOA File for Bankruptcy?

X.Y. from New Jersey writes:

Dear Mister Condo,

Can an HOA file for bankruptcy in NJ? If the HOA has debts that the HOA cannot pay and keep the property properly maintained and operating? Because of a loophole in the law, a homeowner sued the HOA and lost, but the expenses were sufficient to defend.

Mister Condo replies:

X.Y., it is very unusual for an established HOA to file for bankruptcy, especially without first having the courts appoint a receiver for the association. The receiver would likely levy special assessments against the unit owners to make good on the debts of the association. Since I am neither an attorney nor an expert in New Jersey law regarding common interest communities, I can’t offer an opinion as to the legality of the bankruptcy filing. My guess is that there is no difference between an HOA or any other business filing bankruptcy. However, as I stated at my opening, it would be truly unusual. If the HOA fails to maintain the property it could be sued by a disgruntled unit owner or owners or, in some truly decrepit state of repair, could face condemnation from local authorities. Even that wouldn’t cause a bankruptcy but could force owners out of their units, which might lead to eventual bankruptcy. I am sure there are underlying issues that have set the association on this path. I highly recommend you seek legal advice from qualified local legal counsel before thinking of such a drastic measure. My guess is you will be advised against it and seek another method of satisfying the debts of the association. Good luck!

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