HOA collections are one of the most important responsibilities an association must manage. Without timely dues and assessments, an HOA cannot pay for necessary services. Board members should understand how to properly handle unpaid dues to ensure the financial health and success of the community.
The Importance of HOA Collections
A consistent HOA dues collection process protects the association’s ability to fund operations, repairs, and amenities. Without a clear policy, disputes and confusion can quickly arise.
A written HOA collection policy ensures all homeowners are treated fairly and consistently. It also strengthens the HOA’s legal standing if collections ever require court action. Most importantly, it helps avoid cash flow shortages that could harm the entire community.
What is a Good HOA Collection Policy?
A strong policy is essential for effective HOA delinquent collections. Associations require guidelines that clearly define payment obligations and outline the consequences of non-compliance.
An HOA collection policy should include the following:
1. Define Due Dates and Late Payments
The policy must clearly state when regular fees and assessments are due. For example, monthly fees could be due on the first of every month. For example, annual fees may be due by January 31.
It should also define when a payment is considered late. Many HOAs offer a grace period, typically five or ten days. After that, the account is officially past due, and late fees can apply.
2. Potential Actions for Unpaid Fees
The collection policy must list possible actions the HOA may take. These actions should escalate if the homeowner continues to fail to make payments.
Common actions include:
- Sending reminder letters
- Applying late fees and interest
- Suspending amenity privileges
- Placing a lien on the property
- Beginning legal action, including foreclosure
Having a clear list can prevent homeowners from accusing the board of unfair treatment.
3. Triggers for Escalation
The policy should specify when the HOA will escalate the collection process. For example, escalation might occur after 90 days of nonpayment. Another option is to escalate once a homeowner owes a minimum dollar amount, like $500 or more. Defining this trigger protects the HOA from being too aggressive or too lenient.
4. Guidelines for Settlement
The collection policy should also explain how homeowners can resolve their debt. It should offer settlement options, such as:
- Payment plans with written agreements
- Waiver of late fees if the full balance is paid within 30 days
- Reduced interest charges for prompt settlements
Flexible options often result in faster collections without the need for costly legal action.
Considerations for an HOA Collection Process
Every association must carefully design its HOA delinquent assessment collections strategy. Several legal and practical factors affect how an HOA should handle collections.
Fair Debt Collection
The federal Fair Debt Collection Practices Act (FDCPA) protects consumers from abusive collection tactics. But, it typically only applies to third-party debt collectors, not HOAs collecting their own debts.
If the HOA hires a collection agency, the FDCPA will then apply. Some state laws also impose fair debt collection requirements directly on HOAs or their managers. Even if not legally required, an HOA should follow fair practices to protect the association’s reputation.
State Laws on Liens
Most states allow HOAs to record liens against properties for unpaid dues, but the exact process can vary. Some states require pre-lien notices, giving homeowners a chance to pay before the HOA files a lien. Others have specific timelines or interest rate limits.
It’s important to adhere to these requirements and conditions. When an HOA ignores these, the law might consider the lien invalid. As a result, the HOA would have just wasted time and money.
State Laws on Foreclosures
Foreclosure is the most serious collection tool, so it should come as a last resort. Again, every state has different rules on foreclosures. Some states require judicial foreclosure, which means the HOA must file a lawsuit. Others allow nonjudicial foreclosure with specific notice procedures.
Many states also protect homeowners by limiting when an HOA can foreclose, such as requiring the debt to exceed a certain amount. Associations should consult legal counsel before pursuing foreclosure to avoid legal missteps.
HOA Management Company vs HOA Collection Agency
An important decision for associations is whether the HOA management company should handle collections or outsource to a collection agency. Management companies often handle basic collections, such as sending reminder letters and tracking late fees. They can sometimes escalate accounts to attorneys if homeowners still don’t pay.
Collection agencies, on the other hand, specialize in recovering debts. They use more advanced tools, including skip tracing, credit reporting, and legal filings. Of course, collection agencies charge HOAs for their services.
If a management company attempts to collect dues for an HOA, the FDCPA may apply. In contrast, collection agencies are definitely bound by fair debt collection laws. Homeowners associations must check their contracts carefully. Some management agreements require outsourcing collections once accounts become delinquent for a certain period.
When to Hire an HOA Collection Agency
An HOA should consider hiring a collection agency when internal efforts fail. Typically, this happens when:
- The owner has not responded to repeated notices.
- Payment arrangements are not made within 90 to 120 days.
- The HOA does not want to pay legal fees upfront.
Collection agencies often operate on a contingency basis, which means they are only paid if they successfully collect unpaid debts. Their fees can range from 20% to 50% of the amount collected. An HOA board should ensure that fees are based on the amount collected, not the amount due. Additionally, some agencies charge additional legal fees if lawsuits or foreclosure actions become necessary.
Keep in mind that using a collection agency means giving up a part of the amount the homeowner owes the HOA. That said, collections can be stressful, and hiring a collection agency can reduce this stress.
Consider HOA Payment Plans
Offering payment plans is often a smart way to resolve delinquencies quickly. Payment plans enable struggling homeowners to catch up without the association needing to take legal action.
Good payment plan practices include:
- Requiring a signed agreement;
- Setting clear deadlines and amounts; and,
- Applying automatic consequences if the homeowner breaks the plan.
For example, the plan may require monthly payments of $100 until the debt is paid in full, with missed payments triggering the immediate filing of a lien. It’s worth noting that some states require HOAs to offer payment plans before escalating to liens and foreclosure.
The Final Word
Board members should handle HOA collections with care and consistency. Most importantly, it is essential to consider legal implications. With a written policy in place, an HOA can standardize collections and reduce its delinquency rate.
Elite Management Services offers comprehensive HOA management services to communities. Call us today at (855) 238-8488 or email us at help@emspm.com to get started!
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