Foreclosures bringing bad debt
Q:As you know, many associations are dealing with the impact of some residents’ inability to pay assessments. Many owners are facing foreclosure. As a result of the rules governing foreclosures, for the first time our association expects to incur some bad debt expenses this year. Do you have any advice on how bad debt should be handled in developing the annual budget and on the financial books of the association?
A: Be very savvy in developing your budget. Keep your members aware of the shortages. At this time of the year, the budget should have been approved and as the weeks pass, you may find that the bad debt restricts necessary repairs, replacements or services. At that point you may need to approve a special assessment. Do not neglect using your CPA for guidance.
Q:When a unit is in foreclosure with no reasonable expectation of collecting monthly assessments or a special assessment, how is that unit’s shortage or a special assessment equitably charged to the remaining unit owners? For simplicity, suppose 10 units each pay 10 percent. One unit goes into foreclosure and there is a special assessment that will be picked up by the nine paying owners. However, the nine members’ undivided common interest only totals 90 percent. Even though they must pay to keep the association running, they can argue that the documents state they must only pay 10 percent of the costs, not 11.11111 percent.
