When Your HOA Says It’s Gone Bankrupt, Where Does That Leave You? 

It seems unthinkable, especially when you’ve paid your HOA bills religiously for years. But the reality is, there is the real possibility of one day receiving notice that your HOA has gone bankrupt.

When and if that day arrives, a million questions will start running through your head, with the all too important question being simply this: Can I continue living in my home if my HOA has gone bankrupt?

The short answer is yes—but only once you know what your HOA's bankruptcy involves.

What it means when an HOA goes bankrupt

In short, an HOA may file for bankruptcy if it isn’t able to pay its significant debts.

“This could include mismanagement, lack of funds, or unpaid vendor obligations,” explains Cara O’Neill, attorney and legal expert at NOLO in California. 

There are a few bankruptcy options available to HOAs, including:

Chapter 7

Also known as liquidation bankruptcy, Chapter 7 involves selling most or all of an HOA’s assets like reserve funds, clubhouse furniture, office supplies, or vehicles to pay creditors. This type of move is rare though.

“[Chapter 7 bankruptcy] is designed for organizations that can’t continue operations and is therefore rarely appropriate for HOAs,” says Carolina Sznajderman Sheir, partner at Eisinger Law in Hollywood, FL.

According to Sheir, a Chapter 7 bankruptcy doesn’t excuse an HOA from paying special assessments, because assessments run with the land under state law.

Chapter 11

A Chapter 11 bankruptcy allows an HOA to continue operating while restructuring its debts under a federal court-approved plan.

“With Chapter 11, an HOA can continue to function, collect assessment, enforce covenants, and contract for services," explains Sheir.

The goal is to restructure debt—not to close down the community. 

“A Chapter 11 plan may include negotiating down disputed claims, restructuring bank loans, extending repayment terms, or implementing special assessments as part of repayment plans,” adds Sheir.

Chapter 13

Chapter 13 bankruptcy may make sense when there are major unexpected expenses or a large judgement or vendor claim that threatens the HOA’s ability to operate.

“Bankruptcy would give the association the breathing room to reorganize without disrupting essential services like common area utilities and trash pickup,” says Sheir.

The most common reasons this happens to HOAs

So, what puts an HOA in a position to file for bankruptcy?

“Poor financial management or even embezzlement alone likely wouldn’t trigger bankruptcy, but it can be part of the overall problem,” explains O’Neill. 

In most cases, unexpected major expenses, such as those resulting from infrastructure failures—mold remediation, foundation issues, or roof replacements—due to delayed maintenance or natural disasters may lead to bankruptcy. 

According to Ido Alexander, managing attorney at AlignX Law in Davie, FL, regular assessments or dues fund day-to-day operations—think utilities, landscaping, management, and insurance premiums. However, they’re not designed to absorb sudden, million-dollar expenses. 

“Even large special assessments (which are less common that you might think) may not solve the problem when repairs cost tens of millions of dollars. Also, it can be difficult to get approved for credit to cover them,” says Alexander.

Legal disputes and foreclosures can also quickly deplete an HOA’s available funds, overburden its members, and push them toward bankruptcy.

This legal process is usually a last resort but it does happen when an HOA has exhausted all other options for debt relief.

How an HOA bankruptcy affects you (and your property) 

If your HOA files for bankruptcy, you’ll be required to help fund the process as you—the homeowner part of the association— are technically liable for its debts. 

Also, selling your home while the HOA is in legal proceedings will be difficult and oftentimes impossible.

“This is because a pending bankruptcy generally must be disclosed to prospective buyers and can quickly scare off lenders,” says O’Neill. 

As your HOA goes through bankruptcy, you may also expect reduced amenities and services. For instance, your community might shut down the pool or clubhouse to save money. 

Once you learn your HOA is going the bankruptcy route, the best thing you can do is remain calm and educate yourself. These expert tips can come in handy if you’re ever in this situation:

Attend HOA meetings

Be sure to go to the HOA meetings as much as you can so you’re always informed. This way you won’t be caught off about the bankruptcy’s impact on assessments, services, and the HOA’s future.

Read financial records 

“You have the right to access financial records including budgets, audits, reserve schedules, contracts, and bank statements,” says Alexander.

Review them on a regular basis so you know which debts are being handled, how much cash is on hand, and how the HOA is recovering from its financial issues.

Continue paying assessments

Bankruptcy doesn’t mean you’re off the hook for assessments. Keep paying them unless you’re notified not to by the HOA board or bankruptcy trustee.

Review vendor contracts

Figure out which HOA vendors will continue and which ones will need to be renegotiated or even canceled. You might need to work with neighbors to take care of maintenance and safety gaps.

Seek professional help early on

“If your HOA is at risk of bankruptcy, it is important to obtain professional help early via experienced association counsel and/or specialized bankruptcy counsel,” explains Alexander.

Do this before things escalate.