Payment Plans: Getting Paid while Getting Leverage
By Shani O. Zakay, Esq.
Payment plan agreements, or payment plans, 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. Civil Code Section 5665, which is part of the recently re-codified Davis-Stirling
Act, 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 are unhappy. 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 insure 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 and 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 6 to 9 months to conclude with
a judgment. Even then, the association can expect at least 2 to 3 months
before assets are located and collected on (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 be 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?
- 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 very 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 4 years of the breach. On the other hand, a party seeking to enforce an oral agreement that has
been breached must do so within only 2 years of the breach, 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.
- 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 practicably
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 compliance.
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
that 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
- 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, both the association and the delinquent owner execute.
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 6 to 9 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.
- 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
- 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 3 or 4 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.
To summarize, 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. When done right,
however, payment plans can prove to be the long-term solution to an association’s
 California Civil Code Section 5665.