After the lenders take the collateral, what next?
When borrowing money, it is important to understand what is at stake. What happens if you don’t pay the loan?
With loan repayment assistance (or recourse debt), you are personally responsible for any unpaid debt, and the lender can take action to collect it – even after taking collateral. In contrast, the lender does not have as many options, so the bank takes more risks.
Asset Provision and Sales
With any loan agreement, you agree to repay on a specific schedule.
For example, a home loan has monthly payments that often take 15 or 30 years. If you stop making payments, you end up making a loan. Depending on your loan (and state law), lenders may have several options to collect on the outstanding loan amount.
Take Collateral: If you used collateral to get approval, lenders can almost always take collateral, sell it and use the funds to pay it back. Common examples of this action include foreclosure with home loans and repayment for unpaid car loans.
Disadvantage: Unfortunately, collateral does not pay off all your credit positions. In a forced down payment, a property could be worth less than the total loan balance, especially if the home loan market has weakened from lending (known underwater or upside down). Any outstanding unpaid balance – which may include fees and expenses related to foreclosure or repossession – is a deficit.
Whether a lender can continue its efforts to collect a deficiency depends on whether or not the loan is a loan.
No Refund: If the debt is not a debt loan, the lender is out of luck. Any balance sheet deficits must be absorbed by the lender (assumed as a loss). As a result, non-recourse loans are the riskiest types of lender loans.
Banks continue to offer many non-repayable loans, but they are struggling to manage their risk. For example, you may need to have a higher credit score to qualify for non-recourse loans, or lenders may require lower credit and value rates to protect themselves.
If the loan is a guaranteed loan, lenders may continue to attempt to collect after taking the collateral. The creditor can obtain a judgment on deficiencies, which is a legal action that allows them to take other legal actions. Typical activities include:
- Collections: The lender can contact you when you are looking for money or the lender can sell the debt to a collection agency that will try to collect
- Disposal: The lender or collection agency may be entitled to take money out of your paycheck (your employer must pay the creditor) until your debt is paid back
- Compensation: Creditors can take funds that in some cases have never been promised as collateral. For example, creditors may be able to take money from your bank account or have an interest in the property you own.
These collection efforts have limits, so talk to your local attorney if they are trying to collect for lack. For example, creditors can only take part of their salary, and that part depends on your financial circumstances – don’t let them take too much.
Likewise, creditors cannot always withdraw money from their bank account – you can complain and limit how much is available to them.
Identifying credit types
Meet with a local attorney or tax advisor to make sure you have a refund or real estate loan. However, you can use the information below for discussion.
State laws often dictate whether a loan is a loan or not. California is best known as a state credit institution that makes it difficult for lenders to sue. Some states provide flexibility to lenders in how they handle defaults, but many lenders do not choose to sue because borrowers in debt often do not have much to sue.
Loans to buy your main residence are most likely loans that are not accrued in non-recourse states.
Refinances, other mortgages and “cash” transactions tend to generate repayment loans (even if you previously had a non-repayable loan).
In other words, you can buy a home and the initial loan is not recourse debt, but any additional credit you use with the same collateral is a loan.
Credit and tax refunds
In the event of default, your tax liability may depend on whether or not you have a loan. Our tax expert discusses these issues in his article: Foreclosures and Taxes. Again, it is crucial to speak with your local tax advisor before filing to get all the details right.
Non-resident debt is good news when it comes to limiting actions that creditors can take. Unfortunately, you may get an unexpected tax bill as a result of your outstanding debt.