A non-recourse loan is protection for the homeowner/borrower in a residential mortgage. Should the borrower default, the lender is prohibited (either by the terms of the note or by state law) from collecting from the borrower after foreclosure. In other words, if there is a deficiency balance remaining after the foreclosure, the lender must eat that balance.
Recourse states allow lenders to pursue the borrower for any debt remaining after foreclosure. The typical process is a lawsuit against the borrower to obtain a deficiency judgment. The lender can then levy bank accounts, garnish wages, or seize property until the judgment is paid.
For instance, imagine a borrower executes a recourse loan for $300,000. The borrower pays $20,000 of his mortgage principle, but then falls on hard times and defaults. The lender forecloses on his home and sells it for $200,000. The remaining deficiency balance is $80,000. In a recourse state, the lender can file a deficiency judgment against the borrower and force him to pay the remaining $80,000.
In a non-recourse state, the borrower is not liable for the deficiency balance. Unfortunately, this can mean paying higher interest rates in these states. The following are non-recourse states:
- North Carolina
- North Dakota
Regardless whether you live in a non-recourse state, bankruptcy can help when you walk away from a house. Under the federal bankruptcy laws, a discharged home loan debt is not collectible from the debtor, ever. There is also no personal tax debt as a result of discharging any debt through bankruptcy.
If you are struggling with debt and thinking about walking away from you home, speak with an experienced bankruptcy attorney and discuss your options. The federal bankruptcy laws are here to help.