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Definition of Recourse Debt

Recourse debt is debt for which the borrower is personally liable. If the borrower defaults on a recourse loan and the value of the collateral is insufficient to cover the debt, the lender can hold the borrower personally liable for any unpaid amount.

Here are some key points to understand about recourse debt:

  1. Broad Recovery Rights: If a borrower defaults on a recourse loan and the sale of the collateral doesn't cover the outstanding loan amount, the lender can go after the borrower's other assets and income streams to make up for the deficiency.
  2. Personal Guarantee: Recourse loans often involve a personal guarantee from the borrower, ensuring that the lender can pursue personal assets if the loan is not repaid.
  3. Common in Personal Loans: Many personal loans, credit cards, and auto loans are recourse loans. If a borrower defaults on such loans, the lender can take legal action to recover the owed amount beyond just repossessing the purchased item or collateral.
  4. Lower Interest Rates: Due to the additional security provided to lenders by recourse provisions, recourse loans might have lower interest rates compared to nonrecourse loans.
  5. Risk for Borrowers: Borrowers take on more risk with recourse loans. If they default and the collateral's value has decreased, they remain liable for the difference between the loan balance and the collateral's value.
  6. Legal Proceedings: If a borrower defaults on a recourse loan and the collateral sale doesn't cover the debt, the lender might obtain a deficiency judgment against the borrower. This judgment allows the lender to pursue the borrower's other assets or garnish wages.