From Boomtown to Slowdown: HOA Assessment Recovery

Javier Delgado: All right, so it is 12:02. It is April 2nd, 2024, and this information is accurate as of today. Today’s presentation is entitled From Boomtown Town to Slowdown – HOA Assessment Recovery, and I am really proud to be here with my partner, Charlene Cruz, who leads the charge in collections. She has a lot of experience in this particular area and she’s going to be sharing her personal experiences and background with the topics that we’re talking about today.

Which brings us to the next topic. What are we talking about today? Well, we’re going to talk about the economy, why it’s important not only to you from a personal perspective, but from your HOA’s perspective. What about the options to collect for those owners who are delinquent? What’s the impact of Prop 209 on your collection options? Foreclosure and why Arizona’s legislature wants you to foreclose. There is a pending bill out there. I cannot emphasize this enough, this is not the law, but it is a bill, it is moving, and we’re going to do something which we don’t normally do. We’re going to bring in a guest speaker, our partner, Chad Miesen, who’s been down at the legislature, pounding the pavement on behalf of all of you to espouse, your points of view and your rights as HOAs, and then we’re going to sum it all up for you. So I read the news a lot. Char, you stay on top of things, right?

Charlene Cruz: Yes, I try to.

Javier Delgado: Yeah. And there’s lots of articles out there. I mean, 15 years ago it was Phoenix and Tucson and every county in Arizona, it’s the end of the world and we’re never going to recover. Well, we did recover. There’s been a boom in development and now the problem is the economy is so strong that things have gotten more expensive. In fact, there was a national survey done by a organization with thousands of members and one of the questions was, are you planning on raising assessments this year? And the answer was yes. Three out of four associations are planning to raise assessments this year. So if you are finding yourself in that situation, know this, you’re not alone. And that’s in part because we are in what some economists and journalists have referred to as a stay in place economy. Wages are strong, people have jobs, but the challenge is, is that housing is more expensive.

And even though you might’ve gotten a raise, and hopefully you got a raise, that if it didn’t keep pace with inflation, it exceeded it. It’s harder to find a home out there, right? There’s less inventory out there. And in fact, according to a recent article in the New York Times, only one in five of those properties has been deemed affordable. And of course, affordable varies depending on who we’re talking about. But the reality is, things are more expensive out there. And when things are more expensive out there, they do have the potential to hit differently. And things hit differently because we are also in what some people are referring to as a kind of two-lane economy. What do I mean by that? Well, if you are a relatively healthy HOA, even if you have higher debt costs, higher expenses, if your association is made up of membership who is in relatively good shape, you may be really well-funded, you may be able to increase your assessments to keep up with your maintenance needs, unexpected expenses.

Maybe you’ve had the opportunity to plan ahead. But, not all of you are in the same shape. Some of you have a broad mix of owners, some of your owners aren’t necessarily higher income earners. Some of your associations haven’t had that opportunity to set money away for a rainy day, or maybe you’ve already had to spend it on walls or roofs or the pool or pavement. We have communities who are approaching their midpoint and they have lots of infrastructure that’s in need of improvement. So we have lots of associations out there who are considering loans and special assessments, raising assessments, just keep up with that deferred maintenance. And if you have the obligation, the need to raise assessments, well you’ve got to figure out how to collect them because as we know, not everybody collects. And Char, you’ve been the de facto leader of this charge in recovering assessments. What’s your kind of philosophy when it comes to going after delinquencies?

Charlene Cruz: The golden rule we have is the longer you wait to get paid, the harder and more expensive it is to collect those unpaid assessments.

Javier Delgado: And you’ve been doing this, how many years now, would you say, working in the collections field?

Charlene Cruz: Over 10 years.

Javier Delgado: And has that changed at all? I mean, has this been as true as the first day you’ve started to today even?

Charlene Cruz: Yes. I think the earlier you get on delinquent assessments, the easier it is and the less you’ll see repeat owners being delinquent again.

Javier Delgado: Now Char, and I know this sounds intuitive. You’re going, “Well, why are you talking about this?” Well, I’ll tell you why. Because we do lots of board meetings Char, where associations don’t understand this basic concept and they think, well, maybe I should just wait until it hits a certain point, right? Maybe they haven’t paid for a year or something like that.

Charlene Cruz: Yes.

Javier Delgado: And that’s not particularly helpful because what are the tools that we’re using right now to recover assessments?

Charlene Cruz: So typically when we get a collection file in our office, the association has made their efforts already to try to get that current from the homeowner gets to us. We do send demand letters, we offer payment agreements for those delinquent assessments. If that doesn’t work, we move to lawsuits seeking a personal money judgment, which the only way to collect those realistically and practically speaking is through wage garnishments.

Javier Delgado: Now, I just spent a few minutes ago telling the audience that the Arizona economy’s in actually pretty good shape. I mean, we’re not economists, but we read the news as we mentioned. And if it turns out that people are relatively well-employed, garnishment actually should be a great tool, shouldn’t it?

Charlene Cruz: Yes. And it had been for some time until Prop 209 was passed.

Javier Delgado: All right, well for those of us in our audience who aren’t Prop 209 nerds, why don’t you give us a little bit of background, but not too much. Not too much, but just a little bit so that we’re all on the same page here. What’s Prop 209? What was the background? How did it change things?

Charlene Cruz: So for background, it was pushed as a predatory debt collection protection act, and it started in California and it was aimed at medical debt. But the way it was written, it included all civil judgments including monetary judgments obtained by homeowners associations. And the purpose of the Prop 209 was to protect debtors, or in this case homeowners assets, from a collection of a judgment. So there was four categories that it affected. It was wages, the amount that you can garnish, bank garnishment, homestead exemption, and personal property exemptions. So they increased the amount that were protected from judgment collection.

Javier Delgado: So in attorney speak, it sounds like they just made it harder to garnish, is that right?

Charlene Cruz: Correct. Correct.

Javier Delgado: Well, talk to us about how the garnishment rate changed and why that’s so important to a board when they’re figuring out what their collection options are.

Charlene Cruz: So, once you obtain a judgment and the homeowner is not voluntarily paying, we typically look at employment options. But with Prop 209, what happened was they created almost like a two-step process so that the debtor had to meet a salary or income threshold. And once that’s met, there was additional amounts of the amount that was typically garnished that was also exempt. So for example, it’s based on the minimum wage and there is a formula, but generally speaking it’s about $51,000. If a homeowner or a judgment debtor makes $51,000 or over, they are subject to garnishment. If they make less than that, they are exempt.

Javier Delgado: Okay. Now I see that you put an example together here. Is it really now six… So you’re saying that something that might’ve taken three months before Prop 209 could now take six years?

Charlene Cruz: Yes, because this example where the HOA obtains A $2,500 judgment and the owner makes over the threshold, so he makes $54,600 a year paid biweekly. So this equals $840 per pay period. Under the prior statute, we get 25% of that. Under the new one, there’s an exemption of, and it’s a formula that’s 60 times the minimum wage, or 840, whichever is less. And if you do the calculation, just for simplicity’s sake, under Prop 209, even if this owner was… Same owner, same amount of judgment, instead of getting the 25% of the $840, it works out to be $9 a week. So $18 a pay period is what the association is getting. And the concern there is, even if you stick with that and you get paid $18 every pay period towards a $2,500 judgment, I think when we did some research, the average length of employment is four years. So even if you are successful in garnishing and you’re collecting some amounts, there’s other considerations to look at when you are garnishing. You might have to file essentially more than one garnishment to satisfy the outstanding judgment.

Javier Delgado: That doesn’t sound great. I mean, it’s hard to find lunch for $15 anymore, even if you’re going to a fast food place. Well, you mentioned that there was this garnishment threshold and why is that such a problem? I mean, of the Arizona median household income is 72,000, and if Prop 209 only requires 51,000 per owner, what’s the problem here?

Charlene Cruz: The problem is the amount that is above the threshold that is still exempt. So even if you meet that threshold, you don’t get… Before it was you get 25% of the disposable income. Under the new law, there’s still an amount exempt over that threshold. So in the prior example, it went from a few hundred dollars per pay period to pretty much $18 a pay period. So there’s just more exempt.

Javier Delgado: It seems like the other problem too is that even though the median household income is above that threshold, because over one out of two households are actually dual income households.

Charlene Cruz: Correct.

Javier Delgado: And because we don’t get to both owners at the same time, 4 out of 10 households, essentially, are going to be garnishment exempt. Is that the right word?

Charlene Cruz: Correct.

Javier Delgado: Okay.

Charlene Cruz: Yes. Garnishment proof, you wouldn’t be able to garnish them.

Javier Delgado: Now we talked about that two-lane economy earlier, and I think here’s a good example of that. We did some research on, well, how much do people really make? What are those median incomes in Arizona? This is the Arizona information. If you happen to have a community that involves a lot of maybe first-time buyers, younger buyers, or older buyers, as you can see from the information on the screen here, there is a 40 to $35,000 discrepancy between that and people who are in their prime earning years. So if you have a community with a lot of younger or older working age people, garnishment is going to be challenging for you as well. So if garnishment is the challenge, are we focusing on foreclosure now?

Charlene Cruz: Yes. So the move is towards, instead of trying to pursue owners in their personal capacity through a wage garnishment, associations are foreclosing its lien for unpaid assessments.

Javier Delgado: When you have discussions with boards about foreclosure, what would you say is the biggest… I mean, nobody wants to foreclose, right?

Charlene Cruz: Correct.

Javier Delgado: What’s the biggest concern or myth that boards have, for those in our audience out there who maybe don’t have a lot of experience with foreclosure?

Charlene Cruz: I think from my experience when I go to board meetings, I think the biggest misconception that boards have is that they’ll spend way more money and end up with a house that they don’t want, or don’t want to maintain, or is otherwise subject to an encumbrance that’s senior in terms of lien priority, like a first mortgage. I think also what’s important to note, why we’re also pushing towards foreclosure is, one of the homeowners misconception is associations can’t foreclose. So, homeowners are out there thinking associations can’t foreclose for whatever reason, whether they have a first or they just don’t realize that that’s a statutory right, and then boards think that it’s an expensive way to get a house that they don’t even want and end up with no money.

Javier Delgado: If you’re talking with a board or a manager about foreclosure, is it fair to say that there’s a good chance we’re not going to go the entire way through the process?

Charlene Cruz: Correct. I think I’d say even over 90% of the foreclosures that we file, not more end up in payment, whether it’s from the time we file the lawsuit to during the redemption period, the association ends up getting paid.

Javier Delgado: Okay. All right. So that’s good. So what we’re hearing is, if you file foreclosure and we’re going to talk now about whether you should file foreclosure or not, good chance it gets paid before. No guarantees, right? No guarantees, right, Char?

Charlene Cruz: Correct.

Javier Delgado: Everything else is good.

Charlene Cruz: There’s always a one-off, but it’s aggressive, but it works.

Javier Delgado: Okay, so let’s talk with everyone. When you’re talking about deciding to foreclose, what does the law say about foreclosure eligibility, at least today?

Charlene Cruz: So to be foreclosure eligible, the homeowner has to be delinquent in assessments alone in the amount of $1,200. So you don’t include late fees or anything like that in the calculation. Or that there has been no payment for a year and whichever is met first. So once either one of those is met, the account is foreclosure eligible.

Javier Delgado: Does it depend on the type of owner, if it’s like a consumer owner or not?

Charlene Cruz: With respect to foreclosures, no, but it probably helps give some background as to the next steps. If it’s an LLC, if it’s a deceased owner, if it’s a rental property. I think that gives us background as to why maybe it’s delinquent, but in either case, the eligibility is the same, but it is important to consider the type of owner that is delinquent.

Javier Delgado: Is it true for these types of non-traditional consumer owners that even if Prop 209 wasn’t in effect, that it might be effectively impossible to garnish an LLC of any cases?

Charlene Cruz: Correct. LLCs, usually they’re single-asset entities. If it’s self-employed, or service industry employees where their wages might not be a true reflection of how much they’re earning. I think that’s something to consider when you’re looking at foreclosure because the alternative of garnishment is just not an option.

Javier Delgado: What I’m hearing is focus on foreclosure. Talk to us about creditor interest. If you’re a board, if you’re a manager, if it’s you, what are you focused on?

Charlene Cruz: We typically look at all the encumbrances on the property. Before we file a foreclosure lawsuit, we do pull a litigation guarantee that lists all the encumbrances on the property. If there’s a first mortgage, IRS tax liens or property tax liens, second mortgages, judgment creditors, it’ll show you all the interests in the property. I think going back to the misconceptions, I think when boards see that there’s a first mortgage or even an IRS encumbrance, that means they can’t foreclose and that’s not necessarily the case. But we do look at all the interests on the property to look how much equity is in the property because in most cases, when there is equity in the property, there’s a good chance that homeowner is wanting to keep the property, we’ll pay the association and not let the house go.

Javier Delgado: Does it factor into your thinking, the fact that it’s hard to find a replacement property, that it’s hard to find a rental that’s affordable and that might be a motivating factor for a delinquent owner as well?

Charlene Cruz: Yes, I think so. I think in terms of trying to live somewhere else and pay rent, I think if the association moves forward with foreclosure, they’re going to start paying it even going forward.

Javier Delgado: All right. We’ve got a question from our audience, Gene, we recognize you and please go ahead with your question.

Gene: Thank you. Among the other interests you mentioned, which have senior rights over a foreclosure from an HOA?

Charlene Cruz: It would be property tax liens and the first deed of trust or a first mortgage. In some cases, IRS liens are also superior in terms of lien priority, but it depends on when those IRS taxes are assessed on the property. But from our experience, we’ve been naming them in our foreclosures because they’ve been agreeing to stipulate to be subordinate to us just so we can proceed with our foreclosure and they intend, if there’s excess proceeds on the property, that’s where they try to get paid.

Javier Delgado: And Gene, just to follow up to what Char mentioned, we have a quick example of the materials we’ll run through that might illuminate that as well. Char, if the board isn’t sure if there’s equity in the property, can foreclosure be a legitimate, effective tool to force that bad owner out? Maybe they own a rental property, they’re not taking care of it, they’ve let it go to crap, so to speak. I know that’s a real technical term. Can you force a bad owner out that way too?

Charlene Cruz: Yes, because if they’re not paying and they don’t redeem it, ultimately it’ll go to sale. And it’ll go to someone who will end up paying. Because if you don’t do anything, they’re just going to remain there, being a bad owner, not paying. And the longer you wait by statute, you’ll start having to write off older assessments and continue having to deal with this owner.

Javier Delgado: Well, let’s talk about equity in properties. It’s something that you brought up, something that Gene brought up as well. Hey, what are the creditor interests in the Prop… See Gene, you got the first shout-out today, so congratulations to you. You will be recognized if you ask a question. No prizes today, just knowledge. We are living in what’s been termed a equity rich economy as well. There’s all these terms. I don’t know if they really mean anything, but they sound so sexy. So there’s an article that says that Arizonans have on average about $200,000 of equity in their property as of six months ago. So that’s a huge change because Char, you were around during the last downturn and the foreclosure rates were through the roof, right?

Charlene Cruz: Yes.

Javier Delgado: I mean, didn’t we literally have-

Charlene Cruz: You mean first mortgage foreclosures, right?

Javier Delgado: Yeah, first mortgage foreclosures. I mean, it was like in some communities it felt like one in four, one in five properties was being sold. But of course the trustee sale… And oh, by the way, I should make sure we all are using the right terms, explain terms because not everybody does this for a living. Some of you actually do fun stuff. No, we love our job. Trustee sales Char, can you explain to everybody what happens if you don’t pay your mortgage or your deed of trust?

Charlene Cruz: So if you don’t pay the… Or actually whatever position it is, mortgage or deed of trust, they can accelerate the loan and pretty much foreclose on the property. Most of them in Arizona is through a non-judicial process. It’s just contractual, and they will essentially set what they call a trustee sale and sell the property to a third party for the amount of the outstanding loan.

Javier Delgado: How long does that process take compared to a HOA judicial foreclosure?

Charlene Cruz: Once it hits foreclosure eligibility, I would say they set the sale… Typically, now we’re getting notices of trustee sale two, three months out, so it’s pretty much quicker because they’re not filing a lawsuit naming lien holders who are junior in terms of lien priority to them. They just have to notice the sale.

Javier Delgado: Well, here’s some good news, even though we have to go to court, the good news is that the US average for these trustee sales is 1.2% of all loans. And in fact, in Arizona we’re below that, unless you’re in Pinal or Pima counties, and even then you’re just slightly above the average. So the good news is that whereas before the risk of that trustee sale was a huge red flag for the moment, and for at least for the foreseeable future, given what economists are saying about real estate values, this equity rich economy should continue. Now Char, walk us through what’s going on in terms of the HOA’s lien priority here.

Charlene Cruz: So HOA’s assessment lien, it’s below the first mortgage, so at the top there in red. But we are ahead of the second mortgage, personal judgments, and other creditors. The parties that are above us are first mortgage, liens recorded prior to the declaration, not too many of those we see. Unpaid property taxes, other governmental assessments against the property. That could be abatement charges from the city or zoning or code compliance. And generally behind the IRS taxes.

Javier Delgado: All right. Gail, you have a question? Proceed please.

Charlene Cruz: You’re on mute.

Javier Delgado: I need you to unmute. Okay, go ahead, Gill.

Gill: Where do you believe access medical recovery charges stand in this lien?

Charlene Cruz: Access, it depends. There’s two types of access liens and generally it depends. I’ve worked with one of the attorneys who handles a lot of those and sometimes they’ll stipulate to lien priority to be less than the association. But in most cases, as Javier was saying, because there’s so much equity in the property, even if we take equal lien priority, we both end up getting paid.

Javier Delgado: Thank you for the question, Gill. So, Char, in some states they have what’s called a super lien.

Charlene Cruz: Correct.

Javier Delgado: In Arizona, we don’t have a super lien, but would it be fair to say we’re basically in second position after the first mortgage, and maybe the property taxes, and some other exotic stuff?

Charlene Cruz: Correct.

Javier Delgado: Okay. All right. So here’s our… Now don’t be too critical, folks. Char and I went to law school, not graphics school, so we did the best, and our budget is zero for graphics. So thank you, administration, which I’m part of. All right. Equity before foreclosure. In this particular example, just assume for argument’s sake, the fair market value of the property is 199,000, but the creditor interests in the property are more than that, 218,000. Is this what we would call an underwater property, Char?

Charlene Cruz: Yes. Typically, people would say it’s underwater only because the total amount of the debt encumbering the property exceeds the fair market value. And I think this is one of the misconceptions from both boards and homeowners as to why they might not want to foreclose because there’s so much debt encumbering the property.

Javier Delgado: So if this is your property, you got issues, you’re not one of these equity rich owners, right, Char? You got a problem.

Charlene Cruz: Correct. Correct.

Javier Delgado: Okay. But the magic of fore… It’s sort of when you’re like at Disneyland and you’re on the Jungle Cruise and they’re like the backside of water, the eighth wonder of the world, right? It’s the magic of foreclosure. Okay, so what happens here, Char, after we foreclose?

Charlene Cruz: So after we foreclose, we wipe out the second mortgage and we wipe out the judgment. So in this case, the $75,000 second deed of trust, and the $10,000 credit card judgment are wiped out from our foreclosure lawsuit. Now, in most cases, because the second mortgage, if you look at the balance owed, the association, in most cases, this is an average amount owed to the association by the time you get to foreclosure, is the $8,000. There are some instances where the second mortgage will pay that off and add it to them, to the amount owed on the second just to preserve theirs. Because they don’t want to lose the $75,000. It’s a business decision for them. They pay us, and they secure their lien priority.

Javier Delgado: Is that happening now, just out of curiosity, Char?

Charlene Cruz: Yes, I’ve seen it happen. It’s not uncommon because a lot of these second mortgages far exceed the amount owed to the association. And because there’s so much equity in the property, it’s almost like they have no choice but to preserve their interest.

Javier Delgado: Will they do it off of a demand letter, or are they requiring that we actually file a foreclosure lawsuit and call our bluff?

Charlene Cruz: The second mortgage wouldn’t even know about the delinquency to the association until they’re served with a lawsuit. So if we send demand letters to the homeowner, the second’s not going to do anything. It’s only when they’re in jeopardy of losing their interest in the property is when they will respond, and that’s when we file the foreclosure lawsuit.

Javier Delgado: Okay. All right. So we’ve done some research here, and the board’s decided, “Hey, we’re going to move forward.” Let’s explain to everybody the steps in actually getting a foreclosure judgment. What happens?

Charlene Cruz: So we file a lawsuit in Superior Court, in whatever county that the property is located in, and we include in it all the charges that are secured by the assessment. So that’s assessments, late charges, collection costs, and legal fees and costs that are related to those delinquent assessments. We name everyone who is junior in terms of lien priority to the association’s assessment lien, we serve everyone. They have their opportunity to file an answer or respond in most cases, especially the junior lien holders. So all the parties other than the owners, none of them contest that they’re junior. So most of the times they either stipulate to lien priority or just allow for us to get default judgment.

With respect to the owner, in most cases, they reach out because now they know that the association’s serious in trying to obtain a current balance and they will reach out and either pay in full or try to get a payment plan from the association, which if is accepted by the board, we do it in the form of a stipulated judgment so that if they breach, we have the right to just proceed with the sheriff’s sale and we don’t have to start the foreclosure process all over again.

Javier Delgado: So a lot of people, it sounds like, will make payment arrangements or pay in full just after the lawsuits filed?

Charlene Cruz: Correct.

Javier Delgado: Okay. When the foreclosure lawsuit judgment’s obtained, is that when the lower creditor interests are knocked out?

Charlene Cruz: Correct.

Javier Delgado: Okay.

Charlene Cruz: And then we would set the sale and sell the association’s interest to third parties.

Javier Delgado: About how long do you typically see it from start to finish? From the moment we file, to the moment you’re walking out of court with that copy of the judgment. Is there a threshold for most of these?

Charlene Cruz: I think the general time that I’ve seen is anywhere from maybe three to six months if there’s less than two or three owners or defendants that we have to name. Of course, there’s some instances where there’s 5, 6, 7, 8 other lien holders we have to name, that can lengthen the process. If the owner is deceased and we have to name their heirs and that also would lengthen the process. But typically it’s three to six months to get the judgment. And then if we set the sale, that’s an additional maybe two to three months.

Javier Delgado: Do owners still contest these lawsuits? How often are you seeing that? How successful are they?

Charlene Cruz: No. In most cases, they know they haven’t paid. If anything, they might say, “I made these payments,” or, “It’s too much.” But there’s typically not someone saying, “Hey, I made all these payments. They’re not reflected on the ledger.” So in most cases, and I think that’s why a lot of these foreclosures end up in a stipulated judgment payment plan with the association and the owner because there’s no dispute that they owe it.

Javier Delgado: All right. So we’ve got our judgment now, and what’s the next process? I mean, is the owner still living in the property at this point?

Charlene Cruz: Yes. So owner remains record owner until title changes. So we have a judgment, they’re still the owner. Say we had a stipulated judgment, they breach, we give that judgment to the sheriff and the sheriff at that point will set the sale for the balance of the judgment owed. So once we give it to the sheriff, they have their own statutory process to follow in setting sheriff sales, which includes providing the notice of the sale. I think there’s three different ways they have to do it, mail, post, and something else. So once they do that, we get the notice of sale. At any point at that time, when the owner wants to redeem the property, they have to go to the sheriff because then the sheriff adds their fees and costs to set the sale. And then-

Javier Delgado: You used the term redeem. I’m going to interrupt you. Pardon me for my rudeness. What does redeem mean for our audience?

Charlene Cruz: So redeem is a statutory right. So once the sale is set and it’s sold to a third party, then by law the homeowner has a final opportunity to keep their home. And if the property’s vacant, it’s 30 days. If it’s occupied, they have six months. During that time, they can pay whatever was bid at the property to keep the home. If they don’t pay during that redemption period, whether it’s the 30 days or six months, at the end of that redemption period, that is when the sheriff’s sale issues their sheriff’s deed, and that’s when title transfers. So during the redemption period, that homeowner stays the homeowner, unless they redeem it, it’s unlikely they’re paying those assessments anyway, but they are the homeowner until the issues their sheriff’s deed.

Javier Delgado: So just to back it up a bit, so if there’s a third-party bidder, is that a good result for the HOA?

Charlene Cruz: Yes. So if there’s a third-party bidder, association gets paid, you get paid. The process is, I think the bidder has five days to come up with the money, that goes to the association. And if the owner wants to redeem the property, that’s between the owner, the sheriff, and the winning bidder.

Javier Delgado: Now, if there’s no third-party bidder, has the association had a successful recovery yet?

Charlene Cruz: No, because there’s still the redemption period. If there’s no other third-party bidder, the winning bid is the opening bid, which is the judgment obtained by the association. And it’s at that point, which is very rare at this time that I’ve seen, is when the association gets title to the property after the redemption period.

Javier Delgado: Okay. All right. All right. So we talked about redemption. And just to clarify, if there’s no third-party bidder, the HOA, they don’t own the property, right? They’re not responsible for the mortgage.

Charlene Cruz: They become record owner of the property after the redemption period, but they are not a party to that first deed of trust, so they’re not required to pay that first mortgage.

Javier Delgado: Do they have to get a deed to become the owner?

Charlene Cruz: Yes. The sheriff’s office will issue a deed after the redemption period.

Javier Delgado: Does the association have to request that they do so, or do they do that automatically?

Charlene Cruz: No, I think every county they do it automatically after the redemption period. And they record it, too.

Javier Delgado: We have question in the chat, what if the owner decides, “Hey, I’m just going to live here for free,” and they become a squatter. It’s an unkind term, but I don’t know another term for it. What’s the option then? How often does that ever happen?

Charlene Cruz: It happened, I’ve seen it once in the past couple of years where the owners just didn’t leave and then it becomes an eviction action. Because once title transfers, then the new owner, whether that’s the association or the winning bidder at a sheriff’s sale, they’re the owners of the property and they would have to go through the eviction process to have the homeowner removed.

Javier Delgado: Is that a relatively quick process?

Charlene Cruz: It’s way quicker than the foreclosure, but you do have to give notices by statute and then have a hearing with the court.

Javier Delgado: All right. All right, perfect. Well thanks for that background. I know that we sometimes get questions about bankruptcies, and of course we’re focusing on foreclosure today why? Well, because the Arizona legislature wants you to foreclose because they keep shutting down every other alternative you have to foreclosing. So with that regard, are you seeing a lot of bankruptcies? If so, which ones? And how much of an impact are they having on foreclosures?

Charlene Cruz: Generally speaking, over the past few years, I’ve seen a trend down in all bankruptcy filings. And the ones that are being filed, I see are mostly chapter 13s. So just generally, there’s different chapters of bankruptcy, 7, 11, 13, and I think there’s like a 12. Before, when the economy was really bad, we saw a lot of seven. Those chapter seven bankruptcies, essentially debtors or homeowners with no assets and they just discharge all their personal obligation. Right now with chapter 13 bankruptcies, creditors including the association, get paid. It’s kind of where the homeowners who are in bankruptcy, they pay all their creditors between 36 and 60 months, pursuant to a bankruptcy plan that has to be approved by creditors and the trustee. The impact on the lien is the lien remains. So even worst case scenario, if there’s a personal discharge in bankruptcy, the association’s lien remains intact.

Javier Delgado: Okay. Any questions about foreclosure? If so, raise your hand, put them in the chat. While you’re thinking about that, Andrea is going to continue to monitor the chat and we’re going to move on to the adjacent topic of excess proceeds. So what’s excess proceeds? And can an association still recover monies via these means, Char?

Charlene Cruz: Yes, so long as there’s equity in the property. So excess proceeds is the money left over from a trustee sale. So for example, I’m just using numbers here. If a property sold at a trustee sale for $300,000, but the amount owed to the bank was $200,000, then there’s $100,000 excess proceeds. That’s the equity. And by statute, people with an interest in the property, including the homeowner, the association, and any junior encumbrances have a right to request those amounts to be dispersed to them. And it’s by statute. So the association is, in most cases, first in line after the mortgage forecloses. So we would get paid first, and then anyone else.

The homeowner, judgment lien holders, can apply for excess proceeds and usually our office does it. We make the application to the court. It typically costs between 2000 to $2,500 and we include that in the amount that we request from the court as part of the excess proceeds to be paid to the association. I saw a question pop up on the chat. Does the lien expire by statute unless the association begins proceedings to enforce the assessment lien? Anything beyond six years is not collectible. So from April 1st, 2018 and older is no longer collectible, but you don’t have to refile.

Javier Delgado: Question Char, we talked about how the foreclosure rates dropped to around 1.2%. What’s the common thread between the properties that you’re seeing go to lender foreclosure, anything there?

Charlene Cruz: For trustee sale, and even when we are proceeding with our own foreclosure, it’s most of the time these are properties that have deceased owners with families who don’t want anything to do with it or have no interest in the property. And so it just goes abandoned, essentially, until the first mortgage begins their foreclosure process.

Javier Delgado: Okay. All right. Just some information for everybody in the background. Okay, well thanks for that. We’re going to bring in our cameo appearance. Chad, are you around?

Chad Miesen: I am right here. Hopefully you can hear me.

Javier Delgado: We can, loud and clear. Okay, so for those of you who don’t know Chad, Chad has been spearheading our legislative group over here that oversees things at the legislature, and you’ve been pretty busy this year. Chad, what’s going on with legislation involving collections this year?

Chad Miesen: As we’ve seen in past years, the legislature’s been active in this area, whether it’s the foreclosure, or what’s secured by the assessment lien, to what has to be done prior to that. In past years, we’ve seen legislation over notices that are provided, a number of things. It’s always a hot topic.

Javier Delgado: Now, Chad, can you answer for our audience, why does the Arizona legislature want us to foreclose so badly on everyone?

Chad Miesen: Yeah, one would think. They don’t, at least based on the reasons for legislation, particularly this year, we’ll talk about HB 2648, is actually to make foreclosure a bit more difficult. But what ends up happening is that foreclosure becomes, frankly, the best option through unintended consequences of their legislation, the best option to recover unpaid assessments and other charges.

Javier Delgado: Now for our audience members, you mentioned this House Bill 2048. This is pending legislation, right, Chad, it hasn’t become law yet?

Chad Miesen: Right. So this was introduced this year, or this session, and it has gone through, it’s a HB 2648, so it’s a House Bill started in the House of Representatives. It had some amendments, then it was passed out of the House, went to the Senate, there were some amendments there. Passed out of the Senate. And because there were some changes in the Senate, it goes back to the House of Representatives to take a look at and see if they’ll pass the latest version with the Senate’s amendments. And if that happens, which I would expect, but we’ll see, then it will go to the governor.

Javier Delgado: All right, so for those of you who’ve had an opportunity to sign up for our legislative updates, Chad’s been at the legislature. Allison Preston, our partner, has been spearheading those legislative updates. So kudos to both of you. And if you would like to get on that mailing list, there’s a slide at the end with that information. So we’re going to walk through this proposed bill and the reason we’re doing it is we don’t know if it’s going to pass, right Chad? We have no idea.

Chad Miesen: Right. I mean, anything could happen. It’s the legislature. There could be huge amendments that happen, or it could just fail on a vote at the very last minute. You just don’t know. Until it’s passed, it is pretty uncertain. And then even when it’s passed, if it passes, obviously the governor has the opportunity to veto it. So what’s the saying? It isn’t done until it’s done, something like that. But yeah, so we have to wait. But this does have, I think, a pretty good chance of passing in its current form.

Javier Delgado: All right, so we did kind of tease out, this is not a full analysis. Like Chad mentioned, anything could happen, this could change. But what we’re doing is just introducing concepts that appear to be sticking with this bill. And the first one, Chad, has to do with this obligation to communicate and offer a payment plan. So is this an obligation that’s imposed upon the association?

Chad Miesen: Well, yes, it’s imposed on the board of directors, but effectively the association has to, if this passes, that’s the caveat, and it’s not amended further, has to exercise reasonable efforts to communicate with the unit owner or member in the case of planned community, and offer a reasonable payment plan before filing a foreclosure action. Now we don’t know what reasonable efforts to communicate are, or a reasonable payment plan, but that’s the language.

Javier Delgado: What if an owner breaks a payment plan? Does the law address an obligation to offer them another one?

Chad Miesen: It does not.

Javier Delgado: All right. Char, how often do people complete their payment plans in your experience?

Charlene Cruz: I’d say there’s a pretty good chance of, especially when we’re in the foreclosure, they do complete it. They might breach it, and we might have to send reminders and take the next step. But ultimately, I think most of our cases do have successful payment plans.

Javier Delgado: But that’s coming from us, right?

Charlene Cruz: Correct.

Javier Delgado: I mean, do you think there’s maybe a different impact if it’s a letter that’s going out on association or the manager’s letterhead? And I’m not saying this in a derogatory manner, the reality is people do respond differently to letters from attorneys, right?

Charlene Cruz: Yes. And I’ve seen by the time it gets to our office, the association in most cases have tried various payment plans. It’s not like they haven’t been communicating with the owner or trying to resolve the balance before it gets to our office.

Javier Delgado: So in your experience, do most associations reach out to owners when they’re delinquent and offer them a payment plan option before it comes to the attorney anyway?

Charlene Cruz: Yes. I think it’s pretty standard among all homeowners associations and I think it’s pretty consistent what they’re offering all owners.

Javier Delgado: Chad, do you have any background as to why they’re imposing this? It sounds like from Char, this may be a nothing burger, but do you have any background as to why they’re codifying this as a potential requirement?

Chad Miesen: Well, what we’ve heard is ultimately there’s this perception that everything’s rushed to foreclosure, that the owners don’t even know what’s happening, which I think is just off base. And so I think there’s a disconnect there from what the legislators are perceiving and reality.

Javier Delgado: Chad, you’re so calm when you speak. I wish that the legislature would give you more of an opportunity to share your knowledge, maybe bring Char down there with you too. You two can show them up. All right, let’s talk about another concept that has the potential to change, foreclosure eligibility. So this has sort of been enshrined in stone for, I want to say like 16 years or so. What’s happening here, Chad?

Chad Miesen: Great question. Not everything that comes out of the legislature makes a whole lot of sense here. It’s kind of unclear what they’re doing because by adding and remains to it, so now it says that, “Only if the owner has been and remains delinquent in the payment of assessments for a period of one year in the amount of $1,200.” It doesn’t really change the fact that it’s, “As determined on the date the action is filed.” So foreclosure is filed, they either are delinquent at that time, and remaining on that same day. It is a little bit weird, but that’s what they’ve added. We tried to get clarification on that and it’s just again, maybe an unfamiliarity with the process, that might be the issue.

Javier Delgado: I was talking with one of my colleagues, Chad, and they were bemoaning the fact that there aren’t enough lawyers in the legislature like there used to be. Has that been your experience? Do you think that’s why the legislators just don’t understand the process?

Chad Miesen: I don’t know. I actually don’t know how many of the legislators are attorneys, whether practicing or trained. There are a number of them there, but I’m not sure if that number has changed over time and in what direction. And of course, they have staff too, so there’s help there. But I think it really comes down to just hearing from constituents, their particular horror story and how that’s communicated to them. That doesn’t match up with what the process really looks like and not understanding it. And so it’s the legislation by anecdote and it doesn’t always work out.

Javier Delgado: Char, anything to add here or do you think that this may have the potential to be another nothing burger as well?

Charlene Cruz: I agree. I think there’s a strong argument that it has no real impact because of the language as determined on the date the action is filed. And I think the people behind this, I think you’re right, Javier, I don’t think they understand the HOA process of foreclosure.

Javier Delgado: Okay. Well so far, so good. But what about this statutory lien? There are some changes here. This is where things start to get a little… I don’t want to, there’s the potential for some impact, right, Chad? What’s going on with the statutory lien and the charges? Which again, these have been enshrined in the law for 16 years or so.

Chad Miesen: Yeah, so many years back, probably, well, over 15 years back, there was a change so that fines were no longer secured by the assessment lien and there hasn’t been much change since then. What they’re doing here, essentially, is really tightening up and limiting what can be included as part of the automatic assessment lien. And they’ve changed it to say late charges only if authorized in the declaration. And reasonable collection fees, reasonable attorney’s fees and costs, this is kind of the big one, reasonable attorney’s fees and costs. It’s still secured by the lien, but only if awarded by a court. So you get into the middle ground of maybe an attorney was involved in preparation of filing a foreclosure lawsuit or maybe it was even filed and the attorney’s fees and costs were not yet awarded by the court, then those attorney’s fees and costs are not yet secured by the assessment lien. And if they sell their house, the question becomes will it get paid through the closing process?

Javier Delgado: Char, in your experience, are there a lot of properties that are passing through escrow where there are attorney’s fees that have been incurred but a judgment may not have been entered yet?

Charlene Cruz: Yes, mostly before we even get to a lawsuit or before a judgment is obtained. So if there’s pre-litigation letters out there that we send, and there’s a request for a payoff, we typically include any fees that we have incurred to that point.

Javier Delgado: Well it sounds like that has the potential to… That’s going to require some more analysis. We’re going to continue to monitor all provisions of the bill, but that one in general as a well. All right, let’s talk about application of payments, some additional changes here. Whoever designs the software that does this, my apologies in advance, we had nothing to do with it. It hasn’t passed yet, but there might be some overtime for the coders. What’s happening here, Chad?

Chad Miesen: So with the first section there, it’s basically clarifying, and again, I think it may just be a perception whether accurate or not, that regardless of what any agreement the association may have with management or an attorney, this is set in stone, how payments will be applied. The second part there, dealing with how payments would be applied, went through some tweaking. But just to clarify, unless the member is directing how it’s to be applied, then this is the default.

Javier Delgado: Char, it sounds like there might be some arguments here if the owner agrees otherwise. Any initial thoughts on that? And again, I know the law is still under consideration.

Charlene Cruz: Yeah, if the homeowner writes on their check or payment where to apply it, I don’t think there’s an issue. But if they’re just sending us a payment, I think it becomes an issue because they’re adding qualifiers to these categories of charges, like unpaid assessments due but not delinquent, unpaid late fees if authorized by the declaration. With respect to reasonable-

Javier Delgado: Let me interrupt you there. I mean, in your experience, do most declarations not provide for late fees or do most of them provide for that?

Charlene Cruz: Most of them do, the older condominiums rely on the Condominium Act to impose late fees, whether it’s late charges or interest. So we do see it sometimes, it’s not too often now. With respect to the collection fees they added incurred or applied by the association, and then again, with attorney’s fees if awarded by the court.

Javier Delgado: I’m glad you mentioned that. And so just for our audience’s benefit, this bill has the potential to impact both the planned community statute and the Condo Act. So just a heads-up, could apply to both of you. Just two final things to wrap up here. So thank you, Chad, for your work at the legislature. Just two final things to wrap up here.

If the bill passes, there is some language that implies you may need to disclose the amount of the judgment lien as part of any payoff. And there’s also some language that mentions that you may not be able to transfer ownership or control of a debt of what’s now termed a common expense lien or unit owner member expense. Chad, any background there for our audience? Or is this just some language that you’re aware of?

Chad Miesen: On that last part there?

Javier Delgado: Yeah.

Chad Miesen: That really comes from the displeasure of some legislators that an association could assign collection to a collection agency or attorney, basically sell it for someone else to collect and then no longer have the ability to control how it’s being collected or what’s going to be collected. And so, they’re basically trying to wipe that out here.

Javier Delgado: I know you don’t have a crystal ball Chad, but if you did, what do you think the timeline is for our industry and our audience to know, hey, is this bill still moving? Is it going to be sent to the governor? When do you think we might know?

Chad Miesen: Well, it was just transmitted back to the House from the Senate yesterday, so it’s tough to say. But if it’s going to move, I mean, I don’t think it’ll take very long. We might see something in the next week or so. And then when it gets to the governor, the governor has five days to decide if she’s going to veto it. So we’ve still got a couple of weeks at least before we really know. I would guess.

Javier Delgado: Okay. Well Chad, I hope you’ll keep us informed and thanks for your work out there.

Chad Miesen: All right.

Javier Delgado: All right, and to sum it up, okay, so what do we got going on? We’ve talked to you about the economy today, things are steady. Of course the Arizona legislature, as we’ve mentioned multiple times, they want you to foreclose because they keep shutting the doors to garnishment as well as to other options. So Char, what does that mean for our audience members in terms of budgeting and changes?

Charlene Cruz: I think you’re going to have to look at increasing your assessments to cover unexpected increases in expenses and including collection costs.

Javier Delgado: And what’s your recommendation for everyone, despite the potential for change right now?

Charlene Cruz: I think continue to get on delinquent accounts as early as possible, because once it’s too long, like we said with the Golden Rule, it’ll be harder to collect. So I think if I was going to say anything, just stay on top of your delinquent assessments and stay on the course for now.

Javier Delgado: Okay. With that being said, we’ll have a few minutes for questions. These are any other topics. I’ll open it up to questions in just about 40 seconds. Here’s our contact information. If you have questions about these or any other topics, reach out to Char, reach out to myself, or any of our attorneys here, Chad as well. We have some upcoming seminars. Our next seminar, if you enjoyed today’s, and we hope you did, will be Tuesday, May 7th by Jonathan Ebertshauser, What You Don’t Know Could Hurt You. And then we have Changes in the Law on hopefully June 4th. We’ve got our statute books and our slickies that remain available. Excuse me. Our new law and flag guide that remain current until and unless any legislative changes occur. And finally, we have Chad and Allison’s legislative update blog. And again, that’s how you sign up and that’s free. All of these materials are free. So if you have questions, now’s the time. I’m going to terminate the share and recognize Bill. Bill, you have a question? Please go ahead.

Andrea Rizen: Bill, you’re muted.

Javier Delgado: Bill, can you unmute real quick? Thank you. Still muted, Bill. Okay, you’re clear now. Thanks.

Bill: Okay, I’m going way back to the beginning of today’s presentation where we talked about wage garnishments. In my community, we’re almost entirely exclusively retired, so there’s no wages involved. Is there a garnishment process that applies to retired folks who may be very wealthy from an asset base, but could try to present a low income basis of just social security income?

Javier Delgado: Char, you want to hit that?

Charlene Cruz: That’s exempt, social security. There’s certain forms of income that are exempt from wage garnishments.

Bill: So asset basis as well. Even if you’re drawing that for income, that’s all excluded.

Charlene Cruz: Well, if you’re looking at personal property assets, Prop 209 did increase the exemption on those two, from 6 to 15,000. Bank garnishments increased, the statutory exemption before Prop 209 was $300 and it increased it to $5,000. So you can still pursue bank and personal property, it’s just exemptions are higher.

Javier Delgado: So Char, should Bill’s community basically focus on foreclosure then?

Charlene Cruz: Yes, I think that’s an option to look at.

Javier Delgado: Foreclose or else is today’s theme. All right, thank you Bill. Any other questions about today’s topics or anything else?

Andrea Rizen: There are a couple in the chat. There’s one, House Bill 2648. Is there by chance a definition of reasonable payment plan?

Javier Delgado: I’ll take that one, Char. So as Chad talked about, there’s no guidance right now. And so the answer is no, not right now.

Andrea Rizen: Okay. And one more. If a lien’s been filed, say delinquent of 2022 dues, and they wish to pay dues for 2023 and 2024, can the lien still stand?

Charlene Cruz: Yes. So if they owe for 2022, lien is recorded, and then they submit a payment endorsing it, I’m paying this for 2023 and 2024. So long as assessments remain delinquent, the recorded lien remains. If you don’t have one recorded, there’s still a statutory lien.

Javier Delgado: Okay, well thank you for your time today. Audience keep in touch for future updates via our legislative blog, our upcoming seminars, and we hope to have some good news, or if not some better news for you with regards to any potential changes to Arizona law. We hope you have a great week. Thank you.

Charlene Cruz: Thank you, everyone.

Andrea Rizen: Thank you everyone, bye-bye.