What should an HOA board do when a vendor or contractor files bankruptcy in the middle of a contract?

By OurHOA · General information · Revised November 3, 2026

What an HOA board does when a contractor or vendor files bankruptcy: the automatic stay, the contract, a proof of claim for the deposit, bonds and unpaid subs.

Part of the HOA board handbook: vendors, projects and upkeep.

The short answer

When a vendor files bankruptcy, federal law takes over the relationship. Stop collecting, stop threatening and do not fire the vendor on your own until the association's attorney has looked at the case. Find the case number, put the vendor's bankruptcy court deadlines on the board calendar, freeze any money the association still owes, and file a proof of claim for the deposit or unfinished work you paid for. If the job had a performance bond, tell the surety in writing right away, because the bankruptcy does not cancel the bond. The board's real decision is about the contract. The vendor's trustee, or the vendor itself in a chapter 11, gets to choose whether to keep the contract or walk away from it, and the association can ask the court to make that choice happen faster. Bankruptcy is federal, but liens, bonds and trust funds are state law, and your contract and governing documents also control. Rules vary by state. This guide is general education, not legal advice, and this is one vendor problem where the board should call a bankruptcy attorney before sending any letter.

Find the case and read the notice

Boards usually hear about it from a crew that stops showing up or a notice from the bankruptcy court. If the association is listed as a creditor, that notice arrives by mail and gives the case number, the chapter, the date of the meeting of creditors and, in many cases, the deadline to file a claim. If no notice came, search the PACER Case Locator for the company's legal name, not its truck-door name. PACER charges 10 cents a page, capped at $3 per document, and waives a quarter's fees of $30 or less. The chapter tells you what to expect. In chapter 7 a trustee sells what the company owns and pays creditors, and the business usually closes. A corporation or LLC gets no discharge in chapter 7, since section 727(a)(1) of the Bankruptcy Code allows one only to individuals. In chapter 11 the company keeps running as a debtor in possession and tries to reorganize, so your landscaper or pool company may keep coming. The meeting of creditors is held 21 to 40 days after the filing, and creditors may ask questions there. Save the petition and the schedules, and check whether the association is listed as a creditor and for how much.

What the automatic stay stops

The filing triggers the automatic stay in section 362(a). It bars any act to collect a pre-filing claim, any lawsuit against the debtor on that claim, and any act to obtain possession of or exercise control over property of the estate. The vendor's rights under the contract are estate property, so a termination letter sent after the filing can violate the stay even if the vendor was in default before it. A contract clause that lets you terminate because the vendor went bankrupt or became insolvent is generally unenforceable under section 365(e)(1). The stay also bars setoff under section 362(a)(7). If the association owes the roofer $18,000 on the last draw and the roofer owes the association $25,000 for work never done, you cannot simply keep the $18,000 and call it even. Hold it, don't pay it, and let counsel ask the court for permission. The stay's text does not reach a claim on a surety bond or subcontractors' own lien rights. When in doubt, the cure is a motion for relief from the stay under section 362(d), not self-help.

Keep, reject or force a decision on the contract

Under section 365(a), the trustee, with the court's approval, can assume or reject any executory contract. If the vendor assumes the contract, section 365(b)(1) requires it to cure the existing defaults, compensate the association for actual losses from them, and give adequate assurance it will perform from here on. Ask for a crew schedule and current proof of insurance. If the vendor rejects the contract, section 365(g) treats the rejection as a breach. The association is then free to hire someone else, and its damages become an unsecured claim in the case. The waiting is what hurts. In chapter 7, section 365(d)(1) deems the contract rejected if the trustee does not assume it within 60 days after the order for relief. In chapter 11, the debtor can wait until plan confirmation, which can take months. Section 365(d)(2) lets the association ask the court to order a decision within a set time. When owners are waiting on a roof repair or a pool opening, that motion is usually worth the fee.

File a proof of claim

The association's claim is the money it paid for work it never got, plus damages if the contract is rejected. File it on Official Form 410, Proof of Claim, with the court where the case is pending. Attach the contract, change orders, the payment record, photos and a one-page calculation: price paid, value of the work in place, cost to finish with someone else. In a voluntary chapter 7 case, Bankruptcy Rule 3002(c) makes a claim timely if filed within 70 days after the order for relief, which is the filing date. If the notice says there are no assets to pay creditors, you can wait. The clerk sends a new notice with a deadline if a dividend later looks possible. In chapter 11 the court sets the deadline. Rule 3003 lets a creditor rely on the debtor's schedules only if they list the claim and do not mark it disputed, contingent or unliquidated. Check the schedules, and if the amount is wrong or carries one of those labels, file. Set expectations with owners. A deposit paid by an HOA is an ordinary unsecured claim. The priority for deposits in section 507(a)(7), capped at $3,800 per claimant since April 1, 2025, covers individuals paying for personal, family or household use, so it does not reach an association. Expect a small share back, or nothing.

Bonds, unpaid subcontractors and trust fund laws

If the contractor furnished a performance or payment bond, send the surety written notice of the default and the bankruptcy now, following the bond's notice clause. Section 524(e) says a discharge of the debtor's debt does not affect anyone else's liability on that debt. Our guide on what to do when a contractor abandons an HOA project walks through the bond steps and hiring a completion contractor. Unpaid subcontractors and suppliers will look to the property next. Their lien rights come from state law, and our guide on what to do when a contractor files a lien on HOA common area covers bonding off and contesting those liens. Hold every unpaid dollar of the contract until the lien deadlines pass. State trust fund statutes can help, because they treat construction payments as money held for the people who did the work. Texas. Property Code section 162.001(a) makes construction payments to a contractor or subcontractor trust funds, section 162.003 makes laborers and suppliers the beneficiaries, and section 162.032 makes misapplying $500 or more a Class A misdemeanor, or a third-degree felony with intent to defraud. Florida. Section 713.345(1) requires anyone paid for improving real property to apply that payment to the labor and materials already owed on the job. Misapplication is a felony, and the degree rises with the amount, up to a first-degree felony at $100,000 or more. Colorado. Section 38-22-127 holds money disbursed to a contractor on a construction project in trust for subcontractors and suppliers, and a violation is theft. It does not apply when the contractor furnished a performance or payment bond.

Money the vendor paid back before filing

One trap surprises treasurers. If the vendor refunded part of a deposit or paid the association a credit in the 90 days before it filed, the trustee may try to recover it as a preference under section 547(b). Section 547(f) presumes the debtor was insolvent during those 90 days. A refund on an old debt that left the association better off than other unsecured creditors fits the pattern. Send any trustee demand letter to the association's attorney before answering, since the Code has defenses. Payments the association made to the vendor were the association's money, not the debtor's, so they are not preferences.

A sample timeline and board motion

Day 0: the board learns of the filing. The treasurer stops all scheduled payments to the vendor and logs the contract balance. Days 1 to 3: pull the case on PACER. Calendar the meeting of creditors and the claim deadline. Send the surety its notice. Photograph the site and secure anything unsafe. Within 7 days: the board meets, in executive session for the legal advice, and votes in open session. A motion can read: "I move that the association retain [firm] to represent it in the bankruptcy case of [vendor], case number [number], authorize the treasurer to file a proof of claim of $[amount] with counsel's review, hold the unpaid contract balance of $[amount] pending counsel's advice, and authorize counsel to seek a deadline for the debtor to assume or reject the contract." Days 7 to 30: file the proof of claim. Send owners a short update on the project and timeline, without guessing what the association will recover. After a rejection: rebid the work and amend the claim with the real completion cost. For the next contract, tie deposits to delivered materials, keep 10 percent retainage, and require a performance bond on large jobs. A big deposit is the money a filing puts at risk.

Sources

These guides are general education for HOA boards and residents, not legal, tax, or financial advice. Rules vary by state and by your community's governing documents - check with a professional for your situation.

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