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.

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