June 29, 2015 by Shani Zakay, Esq.
Payment plan agreements play an instrumental part in associations'
struggle to minimize delinquencies. In fact, payment plans are so important
that the California legislature made sure to require boards to consider
them in a meeting when a delinquent owner makes a request (1). Civil Code
Section 5665 compels boards to meet with a delinquent owner, in executive
session, within 45 days of a written request to discuss a payment plan,
but many times the circumstances surrounding the request make it disadvantageous
for the board to entertain.
Consider the following: a repeat rule-violator has been delinquent for
two years. The board retained a collection attorney to initiate legal
action, and litigation is already underway. The debt nears $5,000, not
counting the $1,500 - $2,500 the board had to pay the attorney to get
to this point. At the 90th hour, the board receives a written request
to meet and discuss a payment plan. The board must comply and the directors
Why should they allow a payment plan after spending $2,000 in attorneys'
fees and costs?
Why should they settle after spending over a year chasing the delinquent owner?
How can they trust an owner who has proved to be a problem to not default
on the payment plan?
How can they ensure that, if the owner defaults, they're not back to
square one-minus $2,000 in expenses and over a year wasted?
Those are not uncommon questions. Payment plans are only effective when
done right. This article attempts to provide some answers and solutions.
We'll start with the why. Why should boards ever entertain a long-term
payment plan when they have a legal right to collect the money immediately
in its entirety? The answer requires a deeper look into the efforts traditional
collection methods demand.
The alternatives to a payment plan include legal action and foreclosure;
both are effective collection tools that come at a cost. The average legal
action (assuming no real opposition by the delinquent owner) will cost
the association between $2,000 and $3,000 in attorneys' fees and costs.
The cost of non-judicial foreclosure falls in the same range. Of course,
those costs are almost always pushed back to the delinquent owner, but
collection is never guaranteed and those expenses may not be recovered.
Next, a legal action, on average, takes six to nine months to conclude
with a judgment. Even then, the association can expect at least two to
three months before assets are located and collected (if any exist). Non-judicial
foreclosure, again, falls in the same range. Depending on whether the
foreclosed property has any equity, foreclosure may or may not lead to
actual recovery, however. Without taking anything away from the effectiveness
of those methods, the board must be prepared to spend money and stay patient.
Payment plans require less patience and almost no monetary expense. The
cost of drafting a good payment plan, even when utilizing an experienced
attorney, is minimal, and can be incorporated into the settlement amount.
In fact, many management companies and collection firms charge a "payment
plan fee" intended to cover that exact cost. Once the payment plan
is executed, the association does not have to wait to see the money; the
cash-flow is immediate. The $5,000 debt may not be paid right away, but
at least parts of it will start flowing into the association's bank
account in a matter of days or weeks. Finally, and this is especially
true with respect to debtors who are current owners and residents of the
association, a board's willingness to work with a delinquent owner
is perceived positively by the membership and can go a long way in improving
the popularity of the board members with their neighbors.
So how do we make sure we do it right?
1. Put it in writing.
Often times when agreeing to a payment plan with a delinquent owner at
a meeting, boards decide to, in the spirit of cooperation, forgo the formalities
of a written agreement, and instead rely on the oral promises exchanged
at the meeting, or the recorded minutes reflecting the agreement. While
a good spirit of cooperation is encouraged, forgoing the written agreement
is a bad idea. As agreeable and understanding as the owner may seem at
the meeting, if he or she ever defaults on the payment, a dispute will
inevitably arise. The terms you thought were so clear will come into question,
and recollection of the details will be challenged. In these situations,
even the minutes will be insufficient. For example, the difference between
a 3-day grace period and a 10-day grace period can be the difference between
compliance and default, but without a written agreement addressing the
issue specifically, a dispute over the grace period could end up in court.
The evidentiary issues created by the lack of a written memorialization
of the parties' agreement are well recognized by the courts as well.
Thus, a party seeking to enforce a written agreement that has been breached
must do so within four years of the breach (2). On the other hand, a party
seeking to enforce an oral agreement that has been breached must do so
within only two years of the breach, (3) presumably to ensure that not
too much time has passed so as to diminish the parties' recollection
of the terms of the agreement. This can be important if the association
finds itself in a situation where legal action is required to enforce
the payment plan agreement.
2. Demand financial information.
The key in achieving a successful payment plan is leverage. When agreeing
to a payment plan, the association, no doubt, is compromising. To be enforceable,
the agreement must also require the owner to make sacrifices. It must
give the owner something to lose, so as to incentivize him or her to maintain
One way to gain leverage is by requiring the delinquent owner's financial
information as a condition to entering into the payment plan. Information
regarding the delinquent owner's employment and bank accounts is essential
for multiple reasons. If spouses and adult-children are also involved,
their information should also be demanded. Don't be shy! You should
ask for the identity of the employers and the monthly income earned, as
well as the bank account numbers and balances as of the date of the payment plan.
The first reason we want this information is to ensure the delinquent owner
is entering into an arrangement he or she can actually afford. An owner
with $300 in monthly disposable income should not enter into a plan requiring
him or her to pay $750 per month because it's unlikely he or she is
going to be able to comply. That agreement will surely fail. This reason
should be disclosed to the owner, as an explanation for the association's request.
The second, and probably more important, reason we want this information
is to develop a record on the owner's assets, so that in the event
of a breach, we know where to find the money. Getting a judgment against
a debtor is difficult enough; locating the debtor's assets (employment,
bank accounts, etc.) after the judgment was awarded is usually even harder.
With the information being provided by the owner as a condition to entering
into the payment plan agreement, the association can save time and money
locating the owner's assets if the agreement is breached and the association
is forced to resume collection efforts. Most owners understand this concept,
and are thereby encouraged to maintain compliance with the payment plan.
In other words, it creates leverage.
Some sophisticated debtors may resist, and the association can still enter
into the agreement without the information. However, if this requirement
is included in the association's collection policy as a necessary
condition to every payment plan, the debtor will be hard-pressed not to
comply, especially when facing aggressive collection efforts by the association
3. Incorporate a Stipulated Judgment.
As already mentioned above, leverage is key. Another way to gain leverage
is by requiring a stipulation for a judgment as part of the payment plan
agreement. A stipulation for a judgment is a legal document, drafted on
pleading paper, executed by both the association and the delinquent debtor.
By executing this document, the owner agrees to have a judgment entered
against him or her in the event of default on the payment plan. In other
words, if the association is required to enforce the payment plan agreement
in court after default, it may simply be able to submit to the court the
stipulation for a judgment signed by the owner, and circumvent the usual
legal requirements necessitating proof by the association that the money
is actually owed. In short, it means the association can get a judgment
without having to prove its case for six to nine months.
The benefit in a stipulated judgment is twofold. First, if legal action
becomes necessary, it will be significantly less time-consuming and less
expensive. Second, it projects the seriousness of the matter and the extent
of the association's wiliness to pursue potential defaults onto the
delinquent owner. With a signed document where he or she agreed to have
a judgment entered in favor of the association, the owner will think more
than twice before defaulting on the plan. He or she will be incentivized
to comply. In other words, it creates leverage.
With a stipulated judgment and financial information on the debtor, defaulting
on a payment plan with the association carries serious consequences for
the owner, and that is exactly what we want.
4. Consider Probationary Periods.
Another tool in the association's arsenal is the probationary period.
Probationary periods are important when the association agrees, as part
of the payment plan agreement, to waive some of the amount owed. When
dealing with a repeat offender, or an owner who has been delinquent for
multiple years, but still demands that some fees or charges be waived,
the collection policy should expressly require a probationary period.
That probationary period can require a delinquent owner to remain current
on his or her monthly dues for a specified period of time (one or two
years) even after successfully completing the payment plan. If the owner
falls into arrears again during the probationary period, the money the
association previously agreed to waive as part of the payment plan can
be retroactively add back as a penalty.
By using a probationary period, the association not only creates an incentive
to comply with the payment plan agreement, but also an incentive to remain
current on the payment of monthly dues after the payment plan agreement
is complete. The penalty in adding back the previously waived charges
5. Keep the Lien.
Finally, no matter how short the plan is, or how small the debt is, the
association should always require an assessment lien be recorded (or remain
recorded) against the subject property for the entire duration of the
payment plan. Most associations record a lien against a delinquent owner
within three or four months of the delinquency. Accordingly, when an owner
requests to enter into a payment plan, the association probably already
recorded a lien against that owner's property. The assessment lien
is a powerful tool that creates strong security for the debt owed to the
association. The benefits associated with liens can be addressed in another
article. But suffice it to say, the lien should stay recorded until the
debt is paid in full.
In summary, the benefits of payment plans are indisputable, and boards
should always consider an owner's request to settle in that manner.
When done wrong, payment plans can result in a disaster - but when done
right, however, payment plans can prove to be the long-term solution to
an association's delinquency problems.