Article By Michael Rome, JD
In an ideal world assessments would be paid by 100% of the homeowners before the due date. This doesn’t happen, and despite various reasons for the delinquencies, boards have to deal with policies on how to approach the question of settlement. I have discussed fines in the past as a separate issue, so this article will apply to regular and special assessments.
Payment Plans Payment plans can be an important tool if used correctly. If a delinquent owner wants to make payments prior to the filing of a Notice of Lien, the payments should not extend beyond a couple of months. Remember that the filing of the Notice of Lien is how the association secures its claim in the event of sale, refinance or bankruptcy. A good general policy is 50% down and no more than two monthly payments.
If the homeowner wants to enter into a payment plan after the Notice of Lien, but prior to filing suit, more monthly payments are acceptable because the association has secured their claim on the deed records. In this situation, our firm also has the delinquent owner sign a promissory note. The promissory note makes clear that the owner acknowledges what they owe, which makes it easier to obtain judgment if it is later necessary to file suit.
After suit is filed, some homeowners will enter into a Consent Order. This is an agreement that they will make monthly payments, but if they default on an installment, the association will obtain a judgment upon request of the court for the balance due minus any payments. Since the association can obtain an automatic judgment upon default, it is not unusual for payments to be spread over 12 or more monthly installments.
Discount To Present Value. If I offered you $50 today or $75 three years from now, which would you take? Put simply, this is the concept of discount to present value. There are formulas for determining discount to present value based upon assumed returns you would receive on the $50 over a three year period of time, but it is the concept that is important. Less in the present can be worth as much or more than a greater amount in the future.
Besides the concept of present value there is also the consideration of having a sure thing in hand now rather than the uncertainty of more later; or perhaps even nothing. This uncertainty factor may be an even stronger driver in settlement than the discount to present value.
As applied to delinquent assessments owed to associations, these considerations are relevant when applied to accepting a lump-sum now that is less than the full balance. This would normally not come into play unless considering older delinquent amounts because it would be unfair to those who pay the full assessments on time to accept less than the balance due on recently delinquent balances. It would also discourage homeowners from paying on time if they know the association will accept less soon after the due date.
Time & Expense. Discount to present value and the certainty of money in hand are not the only variable when considering a lump-sum settlement. If an owner who has a delinquent balance of $2,500 is sent a warning of suit and offers to pay $1,500 in settlement, should the board seriously consider the offer? Yes, they probably should because suit will take further time and expense. Also, there could be other factors such as a possible counter-claim by the owner, or the lack of detailed financial records on the part of the association.
In summary, although each situation has to be evaluated by the board on its particular facts it is important to have an understanding and general approach regarding settlement of delinquent assessments. Payment plans for the full amount due can be appropriate when not spread out over too long a period of time. Conversely, acceptance of less than the entire balance in a lump-sum payment can be in the best interests of the association when considering present value, certainty of payment in hand, and future expenses.