What happens if our association reserves go to zero and we don’t have money to do maintenance? Do we go bankrupt?
An association that fails to make adequate contributions to their reserve fund are on a path to insolvency. Could the board take on significant debts that it can’t pay for? Yes, they could. There are two type of bankruptcy Chapter 7 (bad) and Chapter 11 (not as bad). The most common filing is Chapter 11 or reorganization. Bankruptcy courts are most in favor of reorganization because they allow the HOA to essentially solve their own problems. The building(s) is the largest asset and a creditor could seize it as collateral for the debt the association took on. It is important to note that an association is set up such that all owners are held accountable for a portion of the debts of the association. This would be a bad day for the owners as the most logical course would be to levy a special assessment to pay for any immediate debt the association has. This may have a trickle effect as the association would then have to collect the special assessments from the owners. The non-paying owners would have leans put on there units and possibly be foreclosed on to satisfy the assessment.
This is an ugly no-win situation for all parties involved. The answer is to not ignore reserves and the forecast of when major projects will occur. The association board needs to be transparent, honest, and frugal in all of their decisions. Through strategic planning, proper budgeting, saving an ample amount of funds in reserve, and keeping open communication with residents about all financial decisions, associationshould be able to function normally within the parameters of their revenue stream.
