The 90-Minute Tour that Never Ends: How to Address the Problems and Pitfalls Presented by Timeshares in Chapters 7 and 13

It often comes as an unwelcome surprise when debtors discover that they cannot force a creditor to take something back that the debtors no longer want, no longer use and no longer intend to pay for. This is especially frustrating when retaining ownership of the property comes with ongoing financial obligations that the debtors expected to be relieved of as part of their bankruptcy. If there is a lien on the undesired property, the debtors can indicate their intention to surrender the property to the lienholder. But the Bankruptcy Code does not require a secured creditor to honor the debtors’ wishes or act upon a debtor’s statement of intention.[1] Unless the debtors reside in a district that allows the forced surrender of property to a lender absent consent (a tactic that is often fraught with risk), the undesired property will remain titled in the debtors’ names until the creditor exercises its rights under state law to foreclose on the property. If there is no lien on the property, the situation is even more complicated. May the property be surrendered, and if so, to whom? Who should receive notice of the bankruptcy?

This situation arises all too often with timeshares. Many times the financial difficulties that resulted in the debtors needing bankruptcy relief have prevented them from enjoying the “lifestyle” they thought they were purchasing when they acquired the timeshare. Typically, the debtors no longer use the timeshare and can no longer afford it. This is often the case even if the timeshare is owned free and clear of a mortgage lien, due to the annual maintenance fees and other dues. The simple fact is that a timeshare is never fully “paid for” due to these ongoing charges. The acquisition price of a timeshare is only a fraction of the ownership cost, once the annual fees and assessments are accounted for. For many debtors, the 90-minute tour promising dreams of guaranteed vacations ends up guaranteeing nothing more than never-ending financial stress.

For chapter 7 debtors, simply surrendering a timeshare does not guarantee relief from the future financial obligations associated with timeshare ownership. Section 523(a)(16) provides that a bankruptcy debtor shall not receive a discharge for fees and assessments that become due and payable post-petition “to a membership association with respect to the debtor's interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot.” This section applies to chapter 7 debtors generally and to chapter 13 debtors in the event of a hardship discharge. Most timeshares fall within the reach of section 523(a)(16). The majority of timeshares in the U.S. are deeded as condominiums, with the debtor owning a fractional interest of a unit. The timeshare interest is further subject to a membership association, often referred to as a property owners’ association (POA), very similar to a homeowners’ association. The requirement to pay association fees is recorded among the land records, such that the obligation “runs with the land,” and the obligation to pay the fees is tied to the real property interest. Therefore, a chapter 7 debtor will continue to have liability for fees and assessments that come due post-petition.

In chapter 13 cases, courts are split on the application § 523(a)(16) and the issue of whether post-petition POA fees and assessments are dischargeable under § 1328(a). Applying the “fair contemplation” test to determine when a claim arises, the Ninth Circuit has recently held that a debtor’s personal liability for post-petition assessments is a prepetition debt that is dischargeable in a chapter 13 case under § 1328(a).[2] This is the only circuit-level decision on the topic since the addition of § 523(a)(16) in 1994 to the Bankruptcy Code. Other courts have held that post-petition fees and assessments are dischargeable in a chapter 13 based on the plain meaning of § 523(a)(16), stating that the inclusion of § 523(a)(16) in the Code indicates that “Congress believed that but for the exception specified, post-petition condominium assessments (like pre-petition condominium assessments) are pre-petition debts on which the in personam liability of a debtor is extinguished by a chapter 7 discharge.”[3] The other line of reasoning, however, holds that post-petition association assessments are post-petition debts that are not covered by a chapter 13 debtor’s discharge.[4] This position, however, seems to increasingly be the minority view.

So, what is a timeshare-owning debtor to do? What can debtors’ counsel do to help debtors more fully recognize their “fresh start?”

1. Wait to file until the lienholder (either a mortgage lien or POA, if permitted by state law) forecloses. Unfortunately, this can often be a painfully slow process, as a lender frequently does not want to assume the responsibility of the POA fees and assessments, and the POA is generally not in a hurry to take back a timeshare if there is plenty of stock to continue to sell to new owners.
2. Attempt to have the debtors negotiate a deed in lieu of foreclosure prior to the bankruptcy or immediately after filing, so that there are no post-petition fees and assessments to be addressed. If fees and assessments have come due post-petition, any agreement in connection with the deed-in-lieu should explicitly forgive the charges and relieve the debtors of any future liability.
3. All entities with a potential interest in the timeshare or claim against the debtor in connection with the timeshare should be noticed, including any lienholder, the POA, and any other organization or association that may be connected to the ownership interest in the timeshare. At least one court held that, even assuming a chapter 13 debtor’s post-petition assessments constituted pre-petition debts subject to discharge, failure to list a condominium association as a creditor prevented a chapter 13 debtor from discharging the assessments because the creditor did not have knowledge or notice of the debtor’s bankruptcy case in time to participate in the case.[5]
4. Debtors’ counsel should always closely review all acquisition documents and invoices in connection with the timeshare. There are “vacation clubs” that are contractual in nature for which the debtor simply has a right to use a resort (or resorts). In addition, there are certain points-based systems in which the debtor doesn’t have an ownership interest in a particular unit or even an ownership interest in a development in general. These types of arrangements may be more appropriately classified as leases or contracts that can be rejected through bankruptcy, as opposed to a real property interest that would be subject to § 523(a)(16).
5. Finally, if it is clear that the timeshare is covered by § 523(a)(16) and a deed in lieu or pre-petition foreclosure is not an option, opt for a chapter 13 and surrender the timeshare. In courts that permit doing so, the plan could even re-vest the timeshare to the lienholder (though this tactic can present its own set of challenges if there is no lien of record). In any event, while not guaranteed to be discharged in every district, the clear trend is for courts to hold that post-petition fees and assessments are dischargeable in a chapter 13.