More than you might realize, the difference in two little words – “recourse” and “non-recourse” – may be what separates you from thousands of dollars in savings.
If you’ve made a financed real estate purchase, such as buying a home on credit, the loan associated with the asset you purchased is either “recourse” or “non-recourse” debt. Determining whether your residential or commercial real estate debt is recourse or non-recourse is pretty easy – your loan agreement should state the nature of the obligation.
What does it mean if you have a recourse loan? Unfortunately for the debtor, it means that you have fewer rights and more risk. In the event of default, a recourse note entitles the lender to not only foreclose against the real property that secures the obligation, but in the event that the value of the note exceeds the value of the foreclosed property, the lender may also pursue the debtor personally for the remaining debt. That is, the bank may take recourse against the debtor.
On the other hand, a non-recourse loan limits the debtor’s default risk to the underlying property. If the debtor’s real property securitizes a non-recourse obligation, the lender’s only remedy in the event of default is the underlying property. In other words, if the value of the outstanding loan exceeds the value of the property, default will leave the bank out of luck on the remaining debt – and the debtor will be free of making further payments.
Enter an important debtor remedy: the strategic default. In the event that a property owner owns real estate that securitizes a non-recourse obligation and the owner is having trouble making payments, a strategic default may be an appropriate approach to consider. Specifically for homeowners whose homes are “underwater” (i.e. the value of the note exceeds the value of the property), a strategic default may make sense.
Of course, before you make any life-changing financial decision, you should consider speaking to the lawyers and professionals at Fears Nachawati. With years of experience advising debtors on issues of bankruptcy, restructuring, and debt solutions, we’re prepared to help you understand all of your options. Call us today for a free consultation.