Recourse Debt vs. Non-Recourse Debt

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What is Recourse Debt vs. Non-Recourse Debt?

A loan is usually backed or "secured" by collateral. Collateral is property that can be accessed by the lender in the event that the borrower goes in debt and fails to pay back the money that they borrowed. With recourse debt, the lender is allowed to "look beyond" the pledge collateral, and may be able to hold the debtor accountable for any unpaid balance. This would allow them to recover the full value of the amount that they loaned out.

In contrast, with non-recourse debt, the lender can only access the collateral in order to make up for defaulted payments on the loan. This can sometimes lead to the lender experiencing losses, for instance, if the property has depreciated.

Each state upholds different laws when it comes to recourse debt vs. non-recourse debt. Some states are "non-recourse states" and don’t allow the lender to go beyond the collateral for debt payment. Also, the difference between recourse and non-recourse debt can have different tax consequences for both parties.

What Types of Loans Do These Laws Apply To?

The concept of recourse vs. non-recourse lending applies to many different types of loans. However, they are most commonly used in the context of a real estate mortgage loan. In such transactions, the collateral would be the home that the mortgage applies to. In the event of a foreclosure, the results could be very different depending on whether the transaction took place in a non-recourse state or not.

What is a Deficiency Judgment?

In a recourse state, the mortgagor might be able to foreclose on the home, as well as initiate a deficiency judgment in which the borrower must repay the missing mortgage payment amounts. If they no longer have any money at that point, the lender might even be allowed to reach other assets of the borrower in order to make up for the payments. For instance, they might be able to have the court initiate a lien on the person’s car, and then seize the car for the payments.

In a non-recourse state, the mortgage lender can usually only do so much as to foreclose on the home and reap whatever profit that they can on the sale. As mentioned, this can often lead to losses for the mortgagor. Non-recourse states have "anti-deficiency" laws which prohibit the mortgager from seeking beyond the collateral for debt repayment.

Thus, non-recourse laws generally serve to protect the borrower from excess or abuse in the event that there is a default. These laws can be very complicated and generally require the assistance of an attorney when dealing with them.

Should I Hire a Lawyer for Help Understanding Recourse Debt vs. Non-Recourse Debt?

Recourse and non-recourse laws can often affect the way that debts and transactions work out in the long run. In addition, such laws are often subject to change depending on market conditions, especially real estate values. You may need to hire a lawyer for assistance and representation if you have any legal issues involving property debt. Your attorney can provide you with the legal advice and guidance needed to succeed on your claim, and can help you defend your own property interests.

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Last Modified: 07-09-2013 02:30 PM PDT

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