Can HOA board forgive unpaid assessments?

Q: Our homeowners association’s board of directors forgave homeowners who were two to three years behind on their assessments. This was done without our knowledge, and we found out about it before our annual meeting. Is this legal? This seems unfair to the homeowners who pay their dues every year.

A:  There is nothing in North Carolina homeowners’ association (HOA) law that says an HOA board can’t “forgive” unpaid assessments from homeowners.  However, I can tell you that forgiveness of debt by an HOA is very rare.

The reason is that the HOA board has a fiduciary duty to the members of the HOA to collect the assessments and use those funds to maintain the common elements in the community. The financial burden of uncollected assessments will eventually fall on the shoulders of the other homeowners.

Since you haven’t shared any details of the board’s reasons for the forgiveness of the debt, it is impossible to say whether their reasoning was justified. The board certainly should not play “favorites” by granting waivers to some owners and refusing to grant waivers to other owners under similar circumstances.  That would subject the HOA and its board to liability for capricious, arbitrary, and possibly discriminatory enforcement of the HOA’s Declaration of Covenants, Conditions and Restrictions (CCRs).

If a homeowner, for whatever reason, is not able to pay assessments in full when due, or in installments within a reasonable time after they become due, the board should engage a lawyer to file a claim of lien against the property to secure the debt.  This protects the HOA by greatly enhancing the odds that the HOA will get paid in the event of a sale, short sale, or mortgage foreclosure of the property, or a mortgage refinance or bankruptcy filing by the homeowners.

A claim of lien is valid and enforceable for three years from the date it is filed. The board is under no obligation to proceed with a foreclosure of the lien unless the board determines, in its business judgment, that doing so is in the best interest of the HOA as a whole.  But filing the lien at least protects the HOA’s claim while the board continues to evaluate the homeowner’s situation and ability to pay.

Originally published in the Charlotte Observer on February 16, 2013

4 thoughts on “Can HOA board forgive unpaid assessments?

  1. Could you expand on this topic — whether “forgiven” or “writeoff for doubful accts”. I would think the HOA would have some kind of doubtful account writeoff policies/procedures in place for financial statement purposes. It seems likely that some account receiveables on the books may exist that could be identified as uncollectible. Also, I would think that some kind of 1099 tax form be issued for the discharged debt. More information please.

    • The reader who sent in this question didn’t give us enough details to understand why the board chose to “forgive” the debt. There’s a difference between “forgiving” debt owed by someone who is experiencing financial hardship, and writing off debt that is uncollectible due to a bankruptcy or mortgage foreclosure. The board should only write off debt when it is clear that the debt is uncollectible, or when it is apparent that collecting it would not be cost-effective (for example, filing a lawsuit to recover a $300 assessment would not be cost-effective). If the owner has not abandoned the home to the mortgage lender or filed bankruptcy, then there is a good chance the unpaid assessments will be collected at some point.

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