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What Is Non-Recourse Debt?

Curious about what non-recourse debt is, and if it can help or hurt you financially? Let’s talk about it and how it works for the average borrower.

What Is Non-Recourse Debt?

Unlike recourse debt (the debt that’s not tied to, or secured by, physical assets), non-recourse debt is all about your collateral. In other words, non-recourse loans are only limited to the assets that you have as a borrower. And if you default on those loans, the lender can only go after the collateral that you had.

That means that if you default, the lender can not go after other assets, including garnishing your wages, your personal accounts, or anything else besides the collateral. In other words, you are not personally liable for the debt.

Types of non-recourse debt include:

  • Certain home loans
  • Commercial property loans
  • Multi-family property loans

As you can see, this debt is most common with property loans and mortgages. And for good reason. Lenders consider non-recourse debt as a high-risk debt. If you don’t pay it back, the only thing they get out of it is the property. So this debt typically has higher interest rates, and are strict when it comes to who qualifies and who doesn’t.

non-recourse debtWhat Happens When Paying Off This Debt?

Many homeowners or property owners have this type of debt. And for the most part, it works just like recourse debt. As long as you’re paying it off, you don’t have to worry about anything.

But unlike recourse debt, if you find yourself in trouble and can’t afford the loan, you won’t have to worry about losing all of your money and assets. However, you could lose your home (or whatever property you default on).

What Happens If I File For Bankruptcy?

With non-recourse debt, you could lose your property when filing for bankruptcy. However, there have been some known loopholes that people have used when filing for bankruptcy. While it’s never recommended, certain states and laws have helped people keep their homes even when filing Chapter 7.

Typically, the bank will seize your property. However, they won’t be able to go after you over other costs, including possible repairs, taxes, or other interests. They can ONLY take back the property.

Does This Help Or Hurt My Credit?

To even qualify for non-recourse debt, you’ll have to have great to excellent credit. Again, this debt is considered more high-risk for the lender. So that means that your credit score has to fit what they deem “safe to loan to”.

If you qualify and are able to secure a non-recourse loan, it affects your credit score just like recourse debt. It can lower or increase your credit score depending on if you pay it on time and pay it off, or if you default.

And remember, certain non-recourse loans are business loans. So if you get a loan for your business, this could hurt both your personal and business credit.

What Else You Need To Know

Here are a few other things you need to know about non-recourse debt:

  • There are non-recourse states: Alaska, Arizona, Washington, Utah, Idaho, Minnesota, California, North Carolina, Connecticut, North Dakota, Texas, and Oregon. So if you have a home loan in these states, it’s most likely a non-recourse loan. This is important to remember, especially if you do default on the loan or file bankruptcy.
  • While not often, a car loan can also be a non-recourse loan. Check your documents to see what it is.
  • Defaulting on a non-recourse loan can negatively impact your credit score, even if a lender can’t pursue additional payments or assets.
  • Unlike recourse debt, you won’t suffer any tax implications if you default on non-recourse debt. For example, with recourse debt, forgiven debt is considered taxable income. If your debt is forgiven (and the asset is seized) with non-recourse debt, you don’t have to report that on your taxes as income. As always, talk with a tax accountant and check your paperwork to confirm which debt you had.

Non-Recourse Debt – The Bottom Line

Non-recourse debt may be considered a higher risk for lenders, but for the borrower, it’s a safer bet. As long as you have a decent credit score, or live in a non-recourse debt state, you have protection if something bad happens and you need to default on your loan.

However, as with any debt, you should always aim to pay back the loan in full and handle your personal responsibilities. But let’s be honest, life happens, and sometimes we can’t always control what goes on. So, do your research and know your rights when it comes to non-recourse debt.

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AUTHOR Kimberly Studdard

Kim Studdard is a project manager for online entrepreneurs and small businesses. When she isn't spending time with her daughter and husband, or reading her growing pile of horror books, you'll find her working on her HR degree and working towards FIRE.

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