Budget Contra Amounts and "Bad Debt"

 

Significant "Past Due" Amounts, per year, showing
"Bad Debt"
Presented monthly to boards by me. (Note 1)

Some fees in arrears to the Association may become "Bad Debt"
In 2013, according to audit, the amount of Bad Debt was $24,563.
"Bad Debt" in the audits is money owed the association that is never collected.

A "contra" account was added to the 2013 annual budget and budgets thereafter.  In the 2019 budget the Board, under old leadership and board president, the board decided to use a "$0" contra amount. In other words, that board decided that all fees due the association would be collected in the calendar year and there would be no "Bad Debt".  

That is not always the case and this post indicates why. I challenged that board but under that president, they not only raised fees with a large apparent budget surplus, they also decided that there would be no "Bad Debt" in 2019.

Keep in mind that in any calendar year there are owners who are in arrears a portion of their fees.  The board knows the precise amount because they are provided with a detailed delinquency report by management each month.  The budget provided to owners usually doesn't indicate delinquencies. The budget YTD (year to date) and Projected Year-End numbers are a fiction because they indicate that all owner fees have been paid year to date, and that all fees will be paid within the calendar year. 

It may be reasonable to assume that most delinquent amounts will be collected by the association.  However, once the board initiates legal action on the part of the association to collect those delinquent fees, it is probable that not all will be collected.

The "contra" amount is a negative number which reduces the amount of budgeted income to the Association. A contra budget category was considered necessary because in bankruptcy court debts may be discharged which means the debtor's fees cannot be recovered.  Furthermore, during foreclosure proceedings not all debts to the association may be recovered. In other words, some fees owed the association may never be recovered.  Such debt is classified by the accountants when doing the audit as "Bad Debt".

The "contra" amount used by the Board in the budgets to owners was -$4,000, although significantly higher amounts were not recovered during a number of years. The annual audits reveal the actual amount of the contra amount and define them as "Bad Debt".   Of course, while doing the annual budget the board can only rely upon prior years audits.  These are helpful indicators.

Here are a few amounts per the audits of a few recent years.  I haven't bothered to publish all of the years 2012 to 2018.  I have not had access to the audits of 2019 and 2020.  Audits cannot be completed until the following year, so the audit for 2021 won't be completed until 2022. That doesn't mean that the audits will be readily available to owners. For example, my access to the 2018 audit was delayed by the board for more than a year after that audit was completed. The following are from audits:

• For the year 2010 the "bad debt" was $6,575.
• For the year 2012 it was $7,000.
• For the year 2013 it was $24,563.
• For the year 2014 it was $7,631
• For the year 2017 it was $900. (Note 1).
• For the year 2018 the bad debt was $3,943. (Note 2).
• For the 2019 budget, the board decided to use $0 (Note 3). 

Why do some debts become "Bad Debts"?

Under the Illinois Condominium Property Act, if a unit is foreclosed and sold to a third part, the Association may be able to collect six (6) months of common expenses and court costs, provided certain steps are taken by the Association. Those steps include initiating its own collection action. If no action is taken and an account is or becomes delinquent, the association attorney has recommended that the Board proceed with a forcible entry and detainer action, so that it may collect some funds, even if the foreclosure is completed. 

In bankruptcy court debts may be discharged which means the debtor's fees cannot be recovered.  Furthermore, during foreclosure proceedings not all debts to the association may be recovered. In other words, some fees owed the association may never be recovered.  

Notes:

1. Each month I prepared an updated spreadsheet using the information provided by management to each of the board members.  My spreadsheet was a "delinquency" spreadsheet and it included tables, charts and graphs from 2008-September 2018.  To be accurate, the financial audits should be used to determine the actual amount of bad debt. The audits include the amount of bad debt, year by year. Because the board creates budgets in November for the following year, the actual amount of bad debt is unknown.  Which is why my spreadsheets were updated monthly to indicate to the board the current amount that owners are in arrears to the association.  The spreadsheet showed this as a table for recent months and also year by year from January 2009 to my final in September 2018. Several charts were included. 

   

   Typical Delinquent and Bad Debt Spreadsheet (click to enlarge)
   Prepared monthly by me and provided to the board
   Uses the Management data provided to all board members each month.

   
   
2. The "Proposed" budget for 2018 indicated a projected December 31, 2017 contra amount of $7,640.  The Board decided to use $4,000 as the contra amount for the 2018 budget, primarily because of the uncertainty.  Boards really don't know the actual "Bad Debt" for any year until the financial audit is completed.
3. The board elected in September 2018 decided to use a $0 contra amount for the budget of 2019. I sternly admonished them for that and the fee increase.  That board had three experienced board members, two have been on the board for a combined 30+ years.
4. Not all board presidents have been equally skillful, and one has been opposed to the use of the "contra" account in the budgets.  The association has been fortunate to have had several presidents who were better leaders as presidents, with varying skill sets and capabilities.  In the period 2011-2015 our board president's work experience was that as a Certified Public Accountant.  My work experience included president of a small "C" corporation, other management positions, and engineer in various capacities.   I'd worked in a leadership role with American multinational corporations and with their management as well as with companies and Nationals of Brazil, UK, Canada, France, Germany, Saudi Arabia, etc.

(c) 2021 N. Retzke