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Tuesday, February 23, 2010

What is the Difference Between Non-Recourse & Recourse States?

State laws regulate the actions that creditors can take when trying to collect on a secured loan. In some cases, states prohibit the creditor from seeking more than the collateral used to secure the loan. This is called “non-recourse” or “anti-deficiency,” meaning that a creditor cannot hold the borrower personally liable for more than the value of the proprety at the time of sale. Generally, in a non-recourse state, if a lender cannot recoup its loan from the sale or seizure of the asset used for collateral, then the relevant state law will limit the lender’s ability to collect from the borrower.

In a non-recourse state, if you default on your home loan, the bank can only foreclose on the home. If the sale proceeds are not enough to repay the loan, the bank cannot take further action or the bank is limited on what it can collect. For example, in a non-recourse jurisdiction such as California, if a borrower owes a lender a $100,000 deficiency after the completion of a short sale or a foreclosure sale, under most circumstances the lender cannot get the money from the borrower. Each state implements “non-recourse” or “anti-deficiency” laws differently.

As of this writing, the following states have some form of non-recourse or anti-deficiency law:



Alaska, Arizona, California, Connecticut, Iowa, North Carolina, North Dakota, Minnesota, Montana, Oregon, and Washington
.

There are also “one-action” states, which means that lenders are only permitted a single legal action to collect mortgage debt. Individual state laws vary. In New York, for example, a lender must choose between the actions of suing to collect the debt or foreclosing on the property. The following states have some type of one-action statute:

California, Idaho, Montana, Nevada, New York, and Utah.

In a recourse jurisdiction such as Ohio, if a borrower owes a lender a $100,000 deficiency after a short sale or a foreclosure sale, the lender can chase the borrower for the difference, i.e., get a personal judgment against a borrower. However, most recourse states have very strict rules governing the process of obtaining deficiency judgments. If a lender does not follow the rules in a recourse state, then it may not be able to obtain a deficiency judgment. For example, under New York State law, a lender must file for a deficiency judgment within 90 days after the foreclosure sale of the property.

As of this writing, these are the recourse states:

Alabama, Arkansas, Colorado, Delaware, District of Columbia (D.C.), Florida, Georgia, Hawaii, Illinois, Idaho, Indiana,  Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Ohio, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming.  

State laws vary. If you are considering a strategic default, consult your state law regarding the creditor’s rights to collect.

15 comments:

Things Appear Clearer in the Rearview Mirror said...

If you choose to let your home go to foreclosure and you have a second for a pool and live in a non recourse state what should you do? Do you send the key back to the lender if they send you an acceleration letter?

Clint said...

I live in California, and 5 years ago I bought a house in Prescott, AZ as a rental investment. With the real estate crash, I am now underwater with this property. I have a tenant, but the rent collected is only a fraction of the monthly mortgage payment, and making up the difference is causing me financial hardship. I understand that Arizona is a non-recourse state but does this apply to investment properties as well? Because I don't live in this house, if I carry out a strategic default, could the bank garnish my wages or seize any assets I may have?

David Ritchson said...

Before you buy an establishment, make sure you think about the future outcome. In this case always put in mind if the said property will be able to gain profit in future years to come.

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andreafox21 said...

The best way to safeguard yourself and your properties is to get a specialist who is versed with the laws of the state since most state laws vary.

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FLowell said...

We were wondering about the idea of Strategic Default as a solution for the house in Port Orchard, WA?
The house is currently valued at 80k less than we paid for it and not likely to recover and they just raised our mortgage by $260.00.

We have renters in it (paying $1300/MO while the mortgage payment is $1900/MO), a new roof ($4500) and new siding ($30000) so we are paying through the nose on a house we will never break even on.

We're thinking of just mailing in the keys and giving up on the place as we have a much better home in North Carolina and won't need a new mortgage for the foreseeable future, so the hit on our credit won't be a big deal.
We bought the place for 240k
It's currently valued at around 160k
so that's 80k plus 34,500 in improvements = us losing 114,500 dollars.

Ideas?

Tarah said...

Most bankruptcies are caused by one of three events: loss of job/failed business, medical emergency or family emergency and bank lending criteria is so hard to reach. You may have been living within your means just fine, but then you lost your job and defaulted on a payment.

salty said...

To Flowell: Be aware that you may have a federal tax liability for any cancellation of debt (COD) associated with the abandonment of the property. Also it seems some of the exclusions would not apply since it is not a principle residence and you are not insolvent. Seek professional advice before acting.

rain said...

Debt cancellation doesn't serve as an escape for the liability. Whether it's an apartment for rent in makati or other properties, the policy has similar applications.

AS400_Loyalist said...

For information on debt cancellation, the IRS has provided this http://www.irs.gov/individuals/article/0,,id=179414,00.html

Even if it's a non-recourse loan, you may still owe taxes from capital gains/loss...but if it's your principal residence and you've lived in it for 2 plus years, there's a 250K exemption for single people, 500k for joint filers.

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