HOA Bad Debt: How to Plan for It
Published: Fri, 02/04/11
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HOA Bad Debt: How to Plan for It
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If you're one of the few homeowners associations with no
delinquencies, skip this tip. Chances are you're still reading.
Good. In this week's tip, we explain when your HOA should have a
bad-debt line item in your budget and how to set the amount.
Let's start with whether your HOA even needs a bad-debt budget
item. That depends on your HOA's history and the type of owners
you have. "If you usually have two or three delinquent owners out
of 100 units, you might not budget for bad debt at all," says
Steve Daniels, coordinating partner of Arnstein & Lehr's West
Palm Beach, Fla., office, who has advised hundreds of HOAs. "If
you have more than that, you might budget for it. In most
communities, we put it on the budget unless it's just a chronic
problem of a certain number of units or the same old units every
year."
Whatever your bad-debt history, start tracking your delinquencies
with a spreadsheet showing the length of time each of account is
delinquent, suggests Elizabeth White, a shareholder and head of
the community associations practice at the law firm of
LeClairRyan in Williamsburg, Va. "Create a spreadsheet of aged
accounts receivable," she advises. "Accounts that in the past
might have gone to 90 days are now going to 120 days. Keep an eye
on where those receivables are stretching out to, and say, 'When
it gets to this point, we're going to send it to our attorney for
collection.' That way you're not running into statute of
limitations problems in filing claims. Be sure you list the
accounts by account number, not owners' names, because you can
run afoul of the Fair Debt Collection Practices Act."
Update and review that spreadsheet regularly. "If you look at
those aged accounts over time, you'll see trends emerge," says
White. "It used to be a rule of thumb that getting your
uncollectible accounts down to 1-2 percent was all you could ever
realistically expect. If you're over that, maybe your billing
program isn't being explained enough, or maybe your lawyer or
manager isn't doing a good job in collecting. You ought to be
able to say, 'Over the last three years, our accounts receivable
has averaged 1-2 percent of the assessments.' But with the
economy, do you adjust that number upward, or do you dig deeper
and get more aggressive on collections? Or have you already done
that? If you do decide to get more aggressive, you should
increase your budget for legal fees and court costs, which a lot
of times boards don't think about."
Next, check with your expert advisors. To learn whom to contact
and what to ask, see our new article:
http://www.hoaleader.com/members/535.cfm
Best regards,
Matt Humphrey
President
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