How to stop an HOA from taking your home
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How to stop an HOA from taking your home

How to stop an HOA from taking your home

In North Carolina, Homeowners’ Associations (“HOAs”) can foreclose on properties in their communities to obtain unpaid assessments, dues, fines, and fees. Foreclosure may seem like a drastic step to obtain debts ranging between $200-$500. However, HOAs are legally entitled to this action when property owners fail to pay their HOA bills. This article provides an overview of what HOAs are, where they get their powers, how HOAs can foreclose on properties, defenses against HOA foreclosure, and when to contact an attorney.

What is an HOA and Where Does it Get its Power?

In North Carolina, HOAs find their legal status and powers under Chapter 47F of North Carolina’s General Statute Code. Chapter 47F outlines how to create an HOA, the extent of an HOA’s power, and the duties of an HOA to its property owners. Since 1999, all HOAs must be organized as nonprofits with the sole purpose to govern a planned community. Just like other nonprofits, HOAs file Articles of Incorporation, By-laws, and Declarations with the state that additionally serve as the legal authority of the planned communities and are enforceable against the HOA. As a nonprofit, all board members, officers, and directors have the same fiduciary duties as those in a nonprofit. Specifically, board members, officers, and directors have a duty to act in good faith, with loyalty to the members of the association, and within their scope of authority.

Chapter 47F outlines how HOAs can operate, including how HOAs can impose fines or community suspensions, conduct meetings and voting, and fine property owners interest for past due assessments. Under Chapter 47F, an HOA cannot impose fines or suspend community privileges without conducting a hearing and cannot impose a fine for violating community rules over $100. HOAs are also required to conduct an annual meeting that satisfies basic quorum requirements. These rules also limit the interest rate an HOA can impose on a delinquent assessment to 18%.

Though Chapter 47F contain these limitations, it also provides HOAs with great power. Specifically, this law enables HOAs to hire, fire, and manage agents and employees on behalf of the community; regulate the use, maintenance, and repair of shared property; grant easements, leases, or licenses as part of the shared property; impose reasonable fines or suspensions for violation of community rules; impose late fees for failure to pay community assessments; and collect owed debts with judicial and nonjudicial foreclosures.

Your HOA Can Foreclose on Your Home

One of an HOA’s greatest power is its ability to foreclose on a property in its planned community for unpaid debts. Article 3 of Chapter 47F provides HOAs with the power to place a lien on a property if a charge is delinquent for 30 days. A lien is a security interest in property that can be used to get an owed payment or performance. Under North Carolina law, an HOA can include past-due assessments, late charges, fines for violating HOA rules, interest on past-due common expenses, and expenses in connection to collecting the owed debt as the basis for the lien. Additionally, HOAs are empowered by law to recover attorneys’ fees and other incidental court expenses they accrue while collecting the debt.

In order to file a lien, the HOA must comply with particular notice requirements. First, Chapter 47F states the HOA must send the property owner notice of the owed debt 15 days prior to filing the claim of lien. Furthermore, once filed with the court, the claim of lien must also be sent to the property owner in compliance with North Carolina’s procedural notice requirements. This means the HOA must provide the property owner with personal notice of the claim of lien or post the notice on the property after certifying the property owner cannot be reached. Additionally, the HOA cannot include attorneys’ fees or expenses in the balance of the lien unless it notifies the property owner of its intent to collect attorneys’ fees and other expenses. Once the property owner has received the notice, he or she has 15 days to pay the initial balance to avoid paying for attorney’s fees. Once the HOA has filed the lien, its claim will be considered “prior” to all other claims except preexisting mortgages and property taxes. This means the HOA has the first right to get paid from the funds generated through foreclosure of the property unless there is a claim by a preexisting mortgage lender, or the government has a claim for unpaid property taxes.

Chapter 47F gives HOAs the power to initiate judicial or nonjudicial foreclosure proceedings to enforce its lien and get the owed debt from the proceeds of the sale of property. In order to initiate foreclosure proceedings, the HOA must wait for the assessment to be delinquent for 90 days before initiating these proceedings. Additionally, the HOA’s executive board must secure a passing vote to commence the proceedings against the specific lot. Once the process starts, the foreclosure will usually proceed as a nonjudicial foreclosure, which occurs without court supervision. HOAs may be forced to utilize a judicial foreclosure if the lien is based solely on fines, interest, or attorneys’ fees. A judicial foreclosure is initiated through a lawsuit and involves much more oversight from the court.

If the court does not oversee the foreclosure process, the property owner is still entitled to the procedural rights and remedies associated with foreclosures. Specifically, property owners are entitled to proper notice and hearing of the foreclosure, have the right to remedy the delinquency before the foreclosure window closes, and can bring any issues of bad faith that may arise throughout the foreclosure process to the attention of the court.

If the HOA complies with all of its duties and procedural obligations, it can proceed with a foreclosure and collect the unpaid assessments, fees, fines, and attorneys’ fees and court expenses after the sale of the property. Though an HOA has every legal right to engage in this conduct, property owners can take affirmative steps to stop this from happening.

How to Stop Your HOA from Foreclosing on Your Property

HOA foreclosures can be a frightening experience, however, there are affirmative steps property owners can take once this process has begun. First, property owners should make every effort to work with their HOA to resolve the issue without litigation. However, if legal proceedings are the only way forward, property owners can also raise defenses against the foreclosure or bring claims against the HOA for its conduct in the debt collection process. Though bringing a claim against the HOA will not directly stop the foreclosure, it could be the leverage property owners need to reach a solution with the HOA.

First, if falling behind on your assessments, property owners should talk to the HOA executive board about payment options. The HOA is comprised of neighbors, and they may be willing to work with property owners in creating a repayment plan or removing some late fees through negotiation. Second, if possible, property owners should pay off the assessment fees during the 15-day window between notice of the debt and the HOA’s filing of the lien. Additionally, if the 15-day window is not long enough to come up with the funds, property owners should try to repay the debt before the foreclosure process begins. This advice also applies to the HOA’s intent to collect attorneys’ fees and court expenses. If possible, property owners should pay off the assessments before attorneys get involved. The debt can increase dramatically from just a few hundred dollars to thousands of dollars when attorneys’ fees are imposed.

Depending on the property owner’s financial condition, repayment may not be a viable option. If this is the case, a property owner may have the ability to contest the foreclosure if the HOA failed to comply with the procedural requirements outlined above. Specifically, the manner in which the HOA went about calculating the assessments, notifying the property owner of the debt, filing the claim of lien, or initiating the foreclosure could all provide grounds for contesting the foreclosure. For example, while not available under North Carolina’s HOA law, some states have laws that prevent the HOA from initiating foreclosure unless the assessment debts meet a minimum amount. If the HOA is attempting to collect assessments that do not meet this threshold, a property owner can petition the court to stop the foreclosure process.

Property owners may also be able to contest a foreclosure if the HOA has violated its Declaration of Covenants, Conditions, and Restrictions, Articles of Incorporation, or By-laws in the foreclosure process. These documents grant HOAs their power, but they also place limits on what the HOA can do and how the HOA can exercise its power. If there are specific limits on the HOAs power to foreclose, it will likely prohibit HOAs from foreclosing on properties in order to collect past due assessments or limit when the HOA can initiate foreclosure. If the HOA still tries to foreclose in direct contrast to the Declaration, Articles of Incorporation, or By-laws, the foreclosure may be stopped.

If there are no legal defenses to the foreclosure itself, property owners could bring a claim against the HOA for any bad conduct associated with the foreclosure. Specifically, North Carolina property owners facing HOA foreclosures should reflect on the manner in which the HOA is collecting the debt owed to see if the HOA has violated North Carolina’s Unfair Debt Collection Statute. This law generally prohibits debt collectors from seeking repayment of debts in an “unfair, deceptive, or unconscionable” manner. North Carolina courts explicitly held that HOAs are considered debt collectors and past due assessments are considered debts for the purposes of the statute. Being covered under the statute means HOAs in North Carolina cannot collect past due assessments in a threatening, deceptive, harassing, coercive, or unconscionable manner. The prohibited conduct under the unfair debt collection statute can be manifested in many ways, but the statute does articulate some conduct as expressly illegal. Common violations of the statute have occurred when debt collectors harass the debtors by calling excessively or at inappropriate and unprofessional times. Furthermore, debt collectors are prohibited from falsely stating the character, extent, or legal status of the debt to intimidate the debtor into paying. If the HOA engages in the prohibited conduct, the property owner is entitled to monetary penalties against the HOA ranging from $500 to $4,000 per violation of the statute.

Other possible defenses or claims to bring against your HOA may be available based on the specific facts surrounding your case. Additionally, if you are located in a different state, other defenses or claims may be available under your state’s specific HOA laws. A review of your specific case is the only way to know what the best next steps are for you.

When to talk to an attorney

It is important to talk to an attorney as soon as possible when dealing with HOA foreclosures. The HOA foreclosure process can move quickly, and certain preventive steps may be missed if a property owner fails to take action. If it becomes necessary, property owners only have one year to commence a legal action to set aside a wrongful HOA foreclosure. Additionally, if the property is sold in the foreclosure to a “good faith purchaser,” or a third party that had no prior knowledge of the HOA’s bad conduct in foreclosing, the good faith purchaser will keep the home. North Carolina courts have repeatedly refused to return the property to the original owner, even when the foreclosure is set aside for bad conduct on the party that foreclosed when a good faith purchaser is involved. An attorney will be able to review the facts specific to your case and decide what the best course of action is.

For more information about HOA foreclosures, a review of your case, and the steps you can take to prevent this from happening to your home, please contact Jim White. The JC White Law Group has experience combatting wrongful HOA conduct and is ready to advocate for your best interests.

This post was co-written with Mallory Miller, JD.

Jim White
jwhite@jcwhitelaw.com

Jim White helps people and companies facing serious financial injury by bringing and defending lawsuits and representing debtors in bankruptcy. He has successfully taken on banks, large financial institutions and other corporations in “David v. Goliath” cases. You can reach him at 919-246-4676.