Recourse VS Non Recourse States For Deficiency Judgments

Recourse VS Non Recourse States For Deficiency Judgments


In order to understand recourse vs non recourse states for deficiency judgments, it may be necessary to consult an attorney or a tax adviser to identify whether your type of loan is a recourse or non recourse.  Basically, it also cannot hurt if you have the services of a good short sale specialist and real estate company that is experienced in the industry that can connect you to an equally experienced short sale Realtor.  The importance of learning the difference between recourse vs non recourse states for deficiency judgments can have a significant impact when you reach a point where you can no longer conform to your financial obligations.

In the context of recourse vs non recourse states for deficiency judgments, it is extremely important to understand that sometimes, lenders opt to sue borrowers precisely because once they go into default; there isn’t much that they can gain.  The simple truth is that the borrower had the capacity to pay the lender he would not even be in default.  Because of this, the manner by which each state allows the lender leniency in terms of legal action, places an immense importance on differentiating recourse vs non recourse states for deficiency judgments.

Identifying Recourse Loans

In order to appreciate recourse vs non recourse states for deficiency judgments, it is important to initially define what recourse loans are all about.  Essentially when we talk about recourse loans, we refer to those that allow the lender to come after the borrower in case a default is reached.  This means that prompting for legal action is almost expected once the borrower reaches default status.  The recourse types of loans are referred to as such primarily because they provide lenders with a great deal of power.  Borrowers are normally pursued for the amount that they owe to the lender even after the collateral has been turned over to the lender.  It is important to realize in terms of recourse vs non recourse states for deficiency judgments that whenever a legal action based on a recourse loan is filed against the borrower, the wages and bank accounts of the borrower can be tied into the suit along with whatever amount is owed.

Deficiency judgment simply refers to the process of filing legal action for the purpose of collecting money after a foreclosure has been enforced.  To better appreciate recourse vs non recourse states for deficiency judgments, it is important to understand that the following states recognize recourse loans:

  • Alabama
  • Arkansas
  • Colorado
  • Delaware
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
  • Illinois
  • Iowa
  • Indiana
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Montana
  • Mississippi
  • Missouri
  • Nebraska
  • Nevada
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • Oklahoma
  • Ohio
  • Pennsylvania
  • Puerto Rico
  • Rhode Island
  • South Carolina
  • Tennessee
  • Vermont
  • Virginia
  • West Virginia
  • Wisconsin
  • Wyoming

Defining Non Recourse Loans

The other side of the recourse vs non recourse states for deficiency judgments coin is the non recourse loans which is exactly the opposite.  In this type of loan, the lender cannot pursue anything from the borrower except for the collateral that has been put up for the loan.  Classic examples would be foreclosed homes.  The bank is only allowed to seize the home but not attach the wages and other earnings of the borrower.  No other legal action is permitted with non recourse loans even if the collected amount is not enough to settle the full loan amount.

These types of loans place the risk mostly on the part of the lenders.  The reason is that they are limited to collecting only the collateral and nothing else.  This is perhaps one of the reasons why short sale transactions have gained ground.  Essentially with short sales, the lender has a better chance of collecting money close to the amount owed allowing them to reduce their risk.  It is important to understand that non recourse loans traditionally carry higher interest rates.  States that apply non recourse loans include:

  • Alaska
  • Arizona
  • California
  • Connecticut
  • Idaho
  • Minnesota
  • North Carolina
  • North Dakota
  • Oregon
  • Texas
  • Utah
  • Washington State

It is essential to keep in mind that every non recourse state exhibits its own anti-deficiency statute that prevents lenders from seeking judgments.  In some cases, the anti-deficiency statue prohibits the lender from collecting limited amounts from the borrower like in the case of the difference between property fair market value and debt.

HELOCS can be Non Recourse

It is vital to realize that some states consider non-purchase money second mortgages like those of HELOCS are widely considered as recourse loans. This means that in case you take out a loan to purchase a home, it can be non recourse, but the equity line associated with the credit used to buy a boat is not. To be constantly aware of recourse vs non recourse states for deficiency judgments you must remember the possibility of being liable for taxes based on the deficiency without regard for the type of loan.  Every state basically implements its own variation or interpretation of the application of the recourse and deficiency statute.

In some states though, the non recourse laws apply strictly to purchase money loans.  Despite the speculation of mortgage refinances not constituting purchase money loans, no pertinent case is available to make an accurate determination.

One Action States on Deficiency Judgments

Another matter to consider with recourse vs non recourse states for deficiency judgments is that some states lenders are only allowed to file one lawsuit in terms of collecting mortgage debts.  How it is applied would of course depend largely on the prevailing state laws.  In some instances, a choice must be made between property foreclosure or debt collection.  One action states based on deficiency judgments include:

  • California
  • Idaho
  • Montana
  • Nevada
  • New york
  • Utah

The laws of these states ensure that only one form of legal action can be taken in the recovery of any debt, including the enforcement of the right secured by the mortgaged levied on a real property. Understanding all these concepts and the variety of implementation of state laws will help you better understand how to address concerns on recourse vs non recourse states for deficiency judgments. To better understand recourse VS non recourse, contact a Short Sale Specialist now as well an an attorney to provide legal guidance!


Allie Zehring

Copyright First Coast Realty Associates 2011


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