What is Nonrecourse Debt?
Nonrecourse debt is a secured debt or loan that entitles a lender to take control of collateral in the event that a debtor fails to make payments on the outstanding balance. In general, the terms and conditions of this type of secured loan prohibit the lender from attempting to gain control of assets that were not pledged as collateral. The nonrecourse loan is one of the most prevalent types of consumer loans offered by banks and other financial institutions today. Sometimes identified as non-recourse debt, this structure does provide some degree of protection for both parties. The lender is assured of at least partially recouping the investment made in the defaulted loan, based on the current value of the collateral pledged when the loan was granted. At the same time, a debtor who is suddenly unable to make payments on the outstanding balance does not have to be concerned about a wide range of assets being seized in order to settle the debt; all he or she stands to lose is whatever co
A Under California law, a debt is considered nonrecourse when a loan is made under either one of the following two circumstances: (1) When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or (2) When the seller carries back financing for all or a portion of the purchase price of any real property. (Cal. Code Civ. Proc. 580b.) In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency. Q 5. What is recourse debt? A Under California law, a recourse debt is one in which neither of the two exemptions in Question 4 occurs. Examples of recourse debt are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans, other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property. The lender is not limited to taking
