 Good afternoon, everybody, and thank you for joining us on Condo Insider today. I'm Raylene Tenno, I'm your host. And along with me is my guest, Loree McGuire, with Porter McGuire and Keokona, LLP. So today we're going to be talking about debt collection. So, thank you so much, Loree, for joining me today on this topic. Kind of a sensitive topic, but it's an important topic. So thank you so much, and welcome. My pleasure. Thanks for having me. Okay, so we're going to really talk about delinquencies. And it's a, like I said, it's kind of a sore subject, but it's an important subject because AILs still need to, even PUDs, HOAs still need to collect their maintenance fees because their budgets are all dependent upon that. So when someone doesn't pay, then, you know, they're going to have less money to do what they need to do. And some of them are like fixed expenses, you know, like if they have utilities, sub-metered utilities, or the building actually has utilities to pay, right? And then employees, because employees have to upkeep the landscaping, and you can't just let the landscaping go and let the weeds grow, right? So they still have the standards of that they have to comply with 514B and maintain the property. So, so let's talk a little bit about when a homeowner goes into a delinquency situation. So generally, your maintenance fees are due at the beginning of every month. And typically, most of them will give like a grace period, like 10 or 15 days. So, but if it's not paid by that grace period deadline, then typically it would go into a late fee will be assessed, right? So what happens after that? So they haven't paid like February's maintenance fee? Well, typically what will happen is they will wait the full 30 days. And if they haven't received the funds by the end of that 30 days, then the management company will send what they call a C1 letter. And that is a letter to the owners, letting them know that they are now 30 days late. And if they do assess a late fee, they will often place that late fee on the notice as well. Not all condominiums do assess a late fee though. Same with HOAs. And at that point, depending on what their structure is, certain HOAs and condominiums have a policy to where they will typically, let me back up, typically they send a C1, a C2, a C3 letter, and then it comes to the attorney. But oftentimes the C2 letter will come at the end of the second 30 day period. That being said, some associations will send it on the 15th day of the second month. They'll send out the C2 letter. And if they don't get a response within 10 days or by the end of the second month, they'll send out the C3 letter. So it depends on the association. Some send out these letters on the 30th day of each month such that the C3 letter will come out on the 90th day of being delinquent. Okay, so if we can go to step one of our PowerPoint, it would be the third slide. So the C1, 2, and 3 letters, is that's the responsibility of the managing agent to send those out? Yes, exactly. Okay, so how long should an AO condo or an HOI wait before they actually pursue debt collection methods through their attorney? Well, it depends on what their policy is, but typically it's either at 60 days or 90 days. You know, they have different policies depending on, for example, how large their maintenance fees are. If their maintenance fees are really large, they don't want to wait a full 90 days. You know, for example, we represent an association that their maintenance fees are $1,800 a month. So you don't want to wait 90 days before you begin collecting on that. So, you know, we will get that at the end of 60 days, but I would say typically we get it after 90 days. 90 days, okay. So with the exception of that big condo, so like some condos are average maintenance fees between three, 500 maybe. So, you know, it's been now six months. And this condo does not have policies in place as to how they go about their debt collection procedures. So what do you recommend that the condo do prior to sending it to you? Because, like I know that they can, like if it's owner occupied, you know, that's one thing but if it's tenant occupied brings up another issue. Can you elaborate what if it's a tenant occupied property and the maintenance fees are delinquent? Well, let's back up a minute. I'd like to cover the collection policy. So when our firm initially takes over a project, one of the first things we do is we recommend to the board that they adopt a collection policy. And basically that policy is that they will send out the first three letters and then it comes to us either at the 60th day or the 90th day. We will then send out a demand letter and giving the owner 30 days to pay. If they don't pay, then we file a notice of lien on title to that unit and send them a post lien demand letter. So we recommend that the board adopt a policy wherein they lay out exactly the time periods they intend to follow, meaning when those C1, C2, C3 letters go out and when it comes to us. And then when it comes to us, we have the policy of us sending out the first demand letter, filing the notice of lien and sending out the post lien demand letter. Okay, all owners are treated the same and you don't get into the problems that boards will have if they don't have a collection policy and that is wherein owners will allege claims of selective enforcement or discrimination. So let's say an association doesn't have a policy and they start collecting on one owner after two months it goes to the attorney, but another owner they wait four months to send it to the attorney. Well that's selected enforcement and they would be right to assert those claims. So we basically recommend that collection policy as a protective mechanism for the board. And then you go to your point about what do you do if they haven't paid for over 30 days and they have a tenant in the unit. Under 514b 145, you can do boards can do what they call a rent intercept. So in that regard, what they have to do is adopt a policy that allows them to intercept an owner's rent from either the tenant or the managing agent. And then once they adopt that policy it has to go out to the ownership for a vote, and it has to pass by a majority vote. Once it does that then they can enforce that policy going forward. And once an owner is 30 days delinquent, you can then send that owner a rent intercept letter and you also send that letter to the tenant or a similar letter to the tenant, notifying the tenant that the tenant will now be paying their rent to you until such time as that debt has been paid in full. I would say you need to keep accurate records because as soon as the debt's been paid in full, you have an obligation to notify that owner and the tenant that the debt has been paid and you are no longer entitled to that rent. Okay, so here's a question for you. So should any member of the board or an employee, such as a resident manager general manager, whoever it would be, have a conversation with the homeowner regarding the homeowner of record regarding that delinquency. No, never, ever, ever do not do that. Number one, it's, you would never get your resident manager involved in something like that. The resident manager is not a debt collector, and you don't want to involve any of your employees in that process. Likewise, no board member should ever talk to an owner about any situation, whether it's debt collection or covenant violation, because typically all members of the board, their sole authority is with the board as a whole. No individual director has any authority to act on their own. Often the problem that you, you find is, you'll hear from an owner and they'll tell you, Oh, well, you know, the board president told me I didn't have to pay last month that, you know, it'd be okay if I waited for three months before I paid you anything. Or, you know, you get that about a number of items and that's very dangerous. Typically, that board member does not have any authority outside the board to do something like that. Moreover, you don't want board members getting involved in debt collection, because then it becomes personal with that board member. You don't want your owners all coming up to your door and knocking on your door and trying to get you to make side deals with them. That would be a disaster on many levels. So no, never, ever. So if a delinquent homeowner came to a board member because they're like, you know, neighbors or their friends are friendly to each other. So as a board member, they should really redirect that homeowner to the managing agent for that conversation. Yes. And if it's been referred to council already the managing agent will tell that homeowner that they now have to deal with council. Because typically the policy is once a matter has been referred to council, the managing agent and the managing company will no longer communicate with that owner until the debt has been paid in full. And that's to ensure that nothing falls through the cracks. What you don't want is to have both parties, meaning the managing agent and the attorney trying to deal with that debt collector with one telling them one thing and one telling them another. That's a disaster. And that's why they have the policy that once it's been referred to council, you no longer deal with the person that has been paid in full. Okay, so the managing agent when it's when the when they given direction by the board, and that direction will more than likely be in executive session, right. That they're going to give the direction to the managing agent to refer this debt to the attorney so the managing agent will now take a copy of all their ledger showing all their payments and the delinquencies and the late fees that has been assessed. They're going to forward that information to you. Correct. But typically, at that point the board is no longer involved once the board, once the board adopts a collection policy in the managing agent and the accountant, or that management company follows that collection policy. So, typically what will happen is the, the accountant for that particular project will send the case the matter to the paralegal, and the paralegal will then begin collection on that particular matter. So the board's not making a decision at that point their decision was made with the collection policy. Right. Okay. Okay, so one of the things I wanted to address to is as a board, when they're looking at their financials are looking at the delinquencies, because this kind of came up in a case, and someone homeowner kept getting late notices, but he kept saying I keep making my payments and he had proof of this and he had no checks. So how can he be getting all these delinquency notices. So, as it came out, when they actually started to look at the financials, they had noticed one homeowner had this huge credit in relation to on their on her account for her maintenance fees. So as it comes out, so that's why I tell everybody you've got to look at your, your delinquencies and, along with everybody else's, because what happened was the person transposed his unit number on his checks. So they weren't being posted to his correct unit number. There are being credited to somebody else because he transposed the unit number. No one can see anyone else's accounts. You can only see your account, but as an owner, you should keep tabs on your account. So I would check my account statement on a monthly basis. So whether or not you've been assessed any late fees or fines. But for example, if you've been sending in your payments, and some people send have their bank send in the payments automatically so you're expecting that your payments are going in timely. But with the mail these days, you know the mail is slow so maybe your payments haven't been getting in there on time. And now you've got a late fee. If you don't know about that late fee, you're going to continue to be hit with a late fee every month. And that can rack up for years if you're not paying attention. So that's why you should be looking at your statement every month. And if there's something on there that you don't agree with, like a late fee, you should question it immediately and resolve it before it gets any worse. Okay, so in that case they when the board was looking at, you know, the delinquencies right, but they had noticed one account was had like overpaid, you know, so when they actually started to look at it. And then they compared it with the guys checks they had noticed he put the incorrect account unit number, which was this persons. So that's why I try to tell people, you know, you got to look at the financials to make sure it makes sense. You see these huge credits on the maintenance report, you got to figure out what's wrong with that, you know, right. So make sure you investigate those before you even send it to debt collection. And it's your responsibility as the owner to track that because there are owners that don't live here year round. So they will pay in advance. And, and so having a credit is not necessarily unusual, because you have so many out of state owners that will pay in advance. Right. I mean, I do that sometimes I pay several months in advance. Because, if you're going on vacation or something right. Right, right. Okay. The collection policy we covered that so that they really, and you guys have a recommended verbiage for a couple of collection policy. Yes, absolutely. Okay. What about, okay, so we covered the collection of rent from a tenant. What about the termination of utilities or being able to use common elements. Yes, that is another asset for purposes of collection. What you can do if an owner has been delinquent for 30 days. If an owner lives in the unit. Then the board again must adopt a policy that will allow for the termination of services, which would include utilities and or the access to the common elements. The majority of the owners have to pass that resolution that was adopted by the board and once it's passed, and you can implement that resolution, and to do so. If an owner's been delinquent for more than 30 days, you have to give them 60 days written notice of your intent to terminate their utilities. The utilities would often include internet service. And it's my experience that when you terminate someone's internet service they tend to pay very quickly. Likewise, you know their electricity if you know, but the problem with utilities is oftentimes they're not separately metered. So you can't shut off everyone's utility so sometimes you can't terminate utilities. You can't terminate access to the common elements, you can't terminate someone's access to their unit. So for example, they may not be able to drive their car into the into the complex. If it's if the entrance is if you use a fob to get in right so they would have to park their car outside. By terminating their ability to use their Bob, that could be very inconvenient for people and it's my experience that this termination works really well if the people can pay they tend to pay at that point. And at the end of the 60 days, boom, you terminate their services immediately, and you're not required to turn them back on until they have paid in full. So, let's talk about this new law that went into place, believe in 2019. It was SB 551, which is now HRS 514B 145-146-5. Yes, and also 146, and that's that's my fault I had told you 146-5, but it's actually the new law comprises both statutes, certain sections in both statutes. Okay. So this one has some new provisions and also has some some pretty consumer protection issues. So, like the homeowner now gets starts to really get serious about, you know, getting this current, and they're looking at all these fees. And some of them they don't agree with and they would like to try to like, you know, reduce his obligation right as much as he can. So can he request mediation. Yes, the owner can, but they must first pay their common assessments, and then they can mediate. So it's paid first dispute later that applies to all common assessments, anything that's not a common assessment, you can dispute first, pay later. So for example, if you're talking about fines, late fees, legal fees, you can mediate first, and then you'd be required to pay those fees after you've gone through mediation. However, you've got to watch the process closely because what happens is, whenever the association or rather council, send you a demand letter. If you then dispute that demand letter and you ask for a debt verification letter, they will then send you typically your ledger. And you then dispute that ledger, they will send you what we call a second debt verification letter. And that second letter triggers a 30 day deadline by when the owner must request mediation in writing if they want to mediate that dispute. From the time of that request, their request, they have 60 days to complete the mediation. So for example, if they don't request mediation within that 30 day period, the association can move forward. If they do request mediation in that 30 day period, but they don't complete it within the 60 day period the association can move forward. So it's a very fast process and the owners need to follow that closely and move quickly towards mediation. Okay, so what if they're a lot of their their issues are not only what they may not be so much maintenance be involved, but how school violations and fines and all that kind of stuff. So, well, typically, if you're dealing with a house rule violation, associations have an appeal process. So if you issue someone a fine under the law they have a right to appeal that fine. And so, you know, some associations that processes is all in writing in others the process is both in writing, and then they have a right to basically appear before the board at the next board meeting to appeal. Appeal that fine, whatever it may be, and then the board makes a decision. There's no appeal process once that decision is made. So, you know, it is what it is once the decision is made, but the owners can go to the board to appeal that fine. And sometimes the board agrees with them and they remove the fine other times they don't and the fine remains. Okay. Okay, so, you know, the board has gone through all the steps you sent out your initial letters, right as an attorney you guys, you said that the initial letters. So what happens if the board there's no communication back whatsoever. So what happens next. Well, depending on the policies of the board. You basically have three options. You can do a judicial foreclosure. You can do a non judicial foreclosure. If the association has a, as adopted a non judicial foreclosure policy in their governing documents, or you can do an assumption action, you can file a an assumption action to protect the debt. However, with regard to an assumption claim, you can only collect up to the amount that had accrued as of the date of the filing of that complaint. So the problem with filing an assumption action is if that person continues to live in the unit and continue to incur maintenance fees, then later on you'd have to file another assumption action. What happens is, if the association can't collect through a rent intercept, or through termination of common, access to common elements, or utilities, then they will file either a judicial or a non judicial foreclosure to pursue the debt. Okay. So, because of the pandemic, I think there's some people that are misunderstanding because there's a moratorium on foreclosures and or addictions. Correct. So, does that apply to maintenance fees. No, it does not. Definitely. People have to continue to pay their maintenance fees. And the reason for that is, as you mentioned earlier, associations are on a zero based budget. So each year is a new year and they budget according to the assessments that they believe will be coming in that year. At the end of the year, that amount should be gone. They should be at a zero based budget by the end of the year. Right. Right. And so they have to collect those maintenance fees or they can't pay their bills. And it's that simple. Okay. So what do you have as best practices for condos, like start off with stop step one, like making sure they have their policies and procedures in place for debt collection. And that's why whenever we get a new project, the first thing we do is send them certain policies that we feel will protect the board, and we'd be beneficial to the association as a whole. Okay, so you technically even a new project but even a new client. So it could be an old project, but you will go over what their whatever existing policies and procedures they have in place. Yeah. Well, when I say new, I mean new to us, not a new association. We look at their policies and we make recommendations to them in terms of the policies that would be beneficial to that association. Okay, so you go over their policies and procedures. Do you try to give the board a little bit of education of do's and don'ts on debt collection like making sure they don't have conversations with the delinquent homeowners and things of that nature. Well, I prefer to actually meet with the board when I first come on board with a new project so I can educate them about collection and things that they should do and should not do because it's a protective mechanism for them and they hire me to represent them and to educate them. That's my job. So yeah, absolutely. Okay, any other suggestions you have for boards. Do they do their debt collection. Well, you know, right now we're in the midst of this pandemic so I know certain of my projects have been allowing their owners to have a two year payment plan instead of a one year payment plan. And oftentimes at the end of the payment plan if the owners have made their payments on time, then they'll waive the late fees. But you know, other projects, it just depends on their financial situation as to what they can afford to do or not do with regard to their owners that are having financial difficulties. But we do our best to try to work with people. Okay, so they've established a payment plan. What happens if they miss a payment on that payment plan. Or they're even struggling because I know everybody says that you have to make it. The homeowner has to establish a reasonable payment plan. So what is considered reasonable are we looking at their financial condition as well. 12 months pursuant to statute is a reasonable payment plan. And if an association, or rather if an owner asked for a reasonable payment plan and you're in the process of doing a non judicial. Under a law, you have to allow that owner that reasonable payment plan. Okay, so they can offer two months. So what happens if they default on their payment plan. We try to work with them. You know, if they miss one month we still we will send them a reminder letter. If they miss two months, we will often send them a reminder letter depending on what their history has been. You know, but if they start to miss four months, three months, then oftentimes we'll send them a default. It depends on if they're communicating with us. Right, we know what's going on but if we haven't heard from that person in in four months, then we'll send them a notice of default. Okay, and then what happens in a situation where. Oh God, it was on top of my head. I forgot what I was going to say. I think we're out of time. Maybe that's why I went out of my head. Thank you. This is really good. I mean, it was very, very easy to understand. And I'm hoping that the, all the boards take the opportunity to review that these this video, so that they can, if they have to reeducate or reeducate themselves with debt collection procedures, because I know sometimes we always have to re educate ourselves, because things change over the years on practices. So I really hope the condo boards take this, this video, this tutorial. Take it to task. Thank you so much for joining me today and having been here. And I hope to see you soon. Yes, I'm sure we will. Okay, thank you everybody.