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Practical Tips for Delinquent Account Reconciliation
Anyone who has worked in the community association industry knows that not all owners pay their assessments in a timely manner. Sometimes, boards need the assistance of a lawyer to collect delinquent amounts. But when the file is ready to be closed, what if the amounts recovered by the law firm do not match the management company’s ledger? In situations like this, community managers and lawyers are thrust in the role of accountant. This article will provide a brief overview on how to reconcile the delinquent owner’s account and bring closure to the matter.
Where to Start
The recommended place to start is to have the lawyer create a ledger with all assessments, late charges, administrative fees, interest, legal fees, costs and payment credits. This is to ensure that all amounts are accounted for in one place and identify all amounts the lawyer recovered. This may be different than what is on the management company’s ledger. Next, compare the lawyer’s account balance to the management company’s balance. Subtract the larger figure from the smaller one to determine the reconciliation gap to be closed.
The following amounts commonly create discrepancies between ledgers and should be explored to close that gap:
Generally speaking, the lawyer’s ledger calculates interest on delinquent amounts and the management company’s ledger does not. This means that if the lawyer receives payment from a delinquent owner, that the payment may include interest.
This can be further complicated if there is a judgment against the delinquent owner where there is pre-judgment interest (i.e. interest on delinquent assessments included in the judgment) and post-judgment interest based on the judgment amount. Failure to put the pre- and post-judgment interest on the management company’s ledger can create an unearned credit on the owner’s account.
For example, say ABC Association has a $1,000 judgment against an owner. There is $50 in interest in that judgment. Then, $50 of interest accrues after the judgment. The owner then pays $1,050 to bring their account current. Unless the management company adds $100 interest to its ledger, it will show a $100 credit on the owner’s account. Thus, to reconcile the account to $0.00, the management company must put $100 in interest on its ledger.
Generally speaking, most associations have the right to collect late charges on delinquent amounts monthly. It is important to note that just because the management company has not put every single applicable late charge on the ledger, that is was not collected by the lawyer. Check to see how many late charges are on the management company’s ledger versus how much the lawyer collected.
Legal Fees & Costs
Under most governing documents and Washington state law, associations can recover its reasonable legal fees and costs from a delinquent owner. Make sure all invoices from the lawyer have been put on the ledger for reconciliation purposes.
Alternatively, sometimes judges reduce the amount in fees and costs the association can recover from a delinquent owner. If that has happened, then the management company will want to remove those amounts off the ledger since they cannot be collected from the owner.
Some governing documents permit the association to collect in the amount of up to three months of regular assessments from a delinquent owner as a security deposit. Furthermore, sometimes up to 12 months of assessments are collectible from a delinquent owner.
If three to 12 months of assessments have been collected in addition to assessments and amounts already accrued, then note the account to make sure no further late charges are added to the account and calculate to ensure the credit balance matches the future assessments recovered.
If an account becomes so entangled due to consecutive collections with judgments, garnishments or sheriff’s sales, then to reconcile the account, consider writing off certain amounts on the account. Soft costs (i.e. interest and late charges) are not amounts the association has actually spent money on, so writing off those amounts to reconcile the account is an easy way to bring the collection matter to a close.
It may take some time, but reviewing amounts described in this article should help managers and lawyers reconcile pesky collection files and put them to bed for good.
This article first appeared in the Jan/Feb Issue of Community Associations Journal.
By Bennett Taylor, Esq.
Bennett Taylor, Esq., is an associate attorney with Leahy Fjelstad Peryea, a law firm dedicated to creating clear and timely solutions for community associations so they can thrive. He counsels clients on a broad variety of legal issues pertaining to its governance and solvency. He currently lives in the Greenwood neighborhood of Seattle with his wife Lindsay, their daughter Sloane and their cat Peanut. In his free time, he likes to spend time with his family, read and golf even when it is raining.