Let’s talk about debt. Specifically, let’s talk about recourse debt. What is it? And why do you need to know about it? If you aren’t sure what it is, keep reading!
What Is Recourse Debt?
Recourse debt is one of two different types of debt. When you have recourse debt, you’re liable for a loan payment – in full. And if you don’t pay, the lender you borrowed from can take back any collateral that you put up to get the loan, PLUS they can require you pay more to cover the loan of the collateral wasn’t enough. For example, car loans are a type of recourse debt.
Think about it, what happens if someone doesn’t pay their car loan? Eventually, the car could be repossessed. And THEN, that person could still owe money, or their account could be sent to collections. That is what recourse debt is.
- Credit cards
- Personal loans
- Other “auto” loans – including boats, RVs, and more
- Some business loans – depending on the partnership and type of loan
With this type of debt, you could be sued, and your wages could be garnished. This isn’t to make you scared, but it shows that this is the type of debt that you don’t really want to fall behind on.
What Happens When Paying Off This Debt?
As long as you’re following your payment plan, you have nothing to worry about when it comes to recourse debt. The problem lies when you start falling behind.
This is the type of debt that could ruin your credit score, garnish your wages, and even make it impossible to get your tax return until you’ve paid it off. The fact of the matter is that lenders want their money. And they’re not afraid to chase you for it.
What Happens If I File For Bankruptcy?
While bankruptcy is not something I’d ever recommend to someone, sometimes it may be necessary. And a silver lining to filing for bankruptcy (depending on the chapter you file) could mean that quite a bit of your recourse debt can be “wiped away”.
Now, that doesn’t mean that bankruptcy should be your answer if you’re drowning in debt. And it doesn’t mean that your slate is wiped completely clean. However, it could help if you absolutely couldn’t pay off all the debt. Unlike non-recourse debt, recourse debt is typically forgiven (with stipulations) after a bankruptcy.
Related: What is NonRecourse Debt?
Does This Help Or Hurt My Credit?
Typically, this type of debt hurts your credit score at first and then helps as you start paying it off (or once you pay it off in full). So lucky for you, if you’re trying to raise your credit score, this is one way to do it. As long as you pay on time and keep your credit score clean, you’ll be just fine. And of course, don’t keep the debt longer than you have to.
What Else You Need To Know
Here are a few other things you need to know about recourse debt:
- You can be responsible for it, even if you’re not the main account holder. For example, if you’re married or a co-signer, non-payment could affect your credit score and you’ll be held liable for paying back what is owed.
- You can lose everything. If you’re putting up certain items as collateral (like your home) on your loan, you could lose them if you can’t pay back on the debt.
- A mortgage is typically considered non-recourse debt. HOWEVER, if you use it as collateral for another debt, it can switch to recourse (and you can possibly lose your home and then some, even during a bankruptcy).
- In reality, you shouldn’t really worry about this type of debt. It sounds scary, but most debt is recourse debt. Again, as long as you pay your bills on time and don’t over-extend yourself, you should be okay.
Recourse Debt – The Bottom Line
Overall, recourse debt is the debt many Americans have. That doesn’t mean you shouldn’t strive to be debt-free, however, recourse debt is not as terrible as it sounds. It’s just a type of debt that lenders offer.
No matter what, always do your research before getting a loan or getting into debt. You should always know your terms and what you need to do in order to pay off the loan. If done responsibly, debt doesn’t have to mean the end of the world for you.
AUTHOR Kimberly Studdard
Kim Studdard is a strategy consultant, product launch expert, and mastermind behind the www.theentrepremomer.com. When she isn't spending time with her daughter and husband, or crying over This Is Us, you'll find her teaching other mompreneurs how to scale their business without scaling their workload.